The risks of small businesses occupying school property

School sites often are often large and not all is required for core educational purposes. Unused (or partially used) premises are often hired out to small businesses such as childcare centres, both in and out of school hours. Generally, so long as they meet safeguarding requirements, these arrangements can work out well. But what happens when the school needs the premises back?

A school will usually have intended for the business to be occupying the premises under a licence. In this scenario, a business may be required to leave on reasonable notice (usually by reference to the period of which a licence fee is paid), without any further right to remain in the property. Often a school will enter into an express licence agreement with the occupier to confirm this, however it may not always be determinative of the actual legal relationship between the parties. Much turns on whether the business has exclusive occupation of the premises and/or pays a regular periodic rent.

Other factors that indicate a licence may be in place are:

  • A licence agreement exists containing express termination provisions;
  • If the business pays a fee for use and occupation of the premises, it is explicitly stated to be a licence fee rather than rent; and
  • The business shares the space with the school and/or can only access the area at certain times.

However, in some cases the business may be occupying the premises as a tenant and may have the right to remain in the premises on the basis that its tenancy should be renewed pursuant to the Landlord and Tenant Act 1954 (“the Act”).

The factors that may indicate a tenancy are:

  • The business occupies the whole of the space;
  • The business pays a sum to the school on a regular periodic basis, which may be considered to be rent;
  • No agreement has been entered into in respect of the premises confirming the school’s ability to terminate the occupation; and
  • The school can only enter the premises on notice.

Whilst a licensee can be required to vacate a property on reasonable notice, the situation for a protected tenant under the Act is more complex. The Act details the process that must be followed, including the service of specific notices and the grounds that may be relied upon to be able to refuse the renewal of a business tenancy.

Unless there is an explicit provision in an agreement that the Act is excluded, it may be implied that the school can only require the business to vacate in limited circumstances. If there has been a breach of the tenancy such as there being rent arrears or the premises are in disrepair, a school may have a valid reason to end the tenancy without the need to compensate the occupier. However, if the school requires the space back for its own purposes or redevelopment, it is likely that compensation will be due. If the matter escalates to Court, it will be unlikely that a judge will grant a possession order if the correct process under the Act has not been followed.

If there has been no fault on the part of the business, an alternative to the statutory process may be to negotiate with it to find other suitable premises and may include some  compensation payment.

The creation of a protected business tenancy can result in matters becoming complicated (and potentially expensive). To minimise the risk schools should:

  • Keep a clear record of all initial correspondence discussing the terms of occupation;
  • Prepare a licence agreement including express terms pertaining to termination and that no tenancy exists;
  • Make it clear on any invoices to the business that sums due are for temporary use and occupation of the property and do not amount to rent;
  • Maintain the ability to access the property and confirm that the business does not occupy the premises to the exclusion of all others.

This list is not exhaustive and it is important that a school takes legal advice if it is considering allowing a business to occupy school premises. Schools need to be aware of the licensee/tenant distinction, and to ensure that the terms of the arrangement are agreed, before the occupation begins.

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