Working from Home - mixed-use residential tenancies
"One in four people now carry out some of their work from home.” - Joseph Rowntree Foundation(1).Changes in work practices, technological advances and economic changes have all had an impact on how and where we work. In Britain 43% of households have Internet access and 52% have a personal computer. Working from home is attractive for lots of different groups of people; but what are the difficulties and pitfalls for those renting out properties in the private sector if they allow their tenants to work from home? Is it something that should be encouraged or discouraged? Are there special rules or other issues that should be considered? This article will seek to identify some of the issues and examine ways of resolving some potential problems that might face the unwary. It is not only legal issues regarding the tenancy that need to be considered; planning, taxation and rating issues all need to be thought about.
Grey area
Residential and commercial tenancies operate in discrete legal frameworks. A tenancy has to be either one or the other, it cannot be both, or so the law thinks. The Housing Act 1988 excludes business tenancies(2) and the Landlord and Tenant Act 1954 excludes residential tenancies(3). This may be a satisfactory legal solution but the practicalities do not always operate quite as neatly. There is inevitably a grey area between the two tenancy types. Each case would have to be examined on its own facts.Whilst common sense would suggest that you consider the predominant use, the law does not necessarily see it that way. In a recent case(4) the Court of Appeal ruled that a tenancy which had started as a business use tenancy, but had over the years become a purely residential usage, remained a lease covered by the Landlord and Tenant Act 1954. In another case(5) a doctor rented a flat and received permission to practise from there in addition to his usual consulting rooms. That was held not to be a business tenancy but it might have been different had he not also had a separate place of business.
Types of home working
We can envisage several common residential tenancy situations where there is a varying degree of working from home:
1. Person who brings work home from the office;
2. Salesman/outworker who spends some time at home;
3. Person working from home for a company based elsewhere in the country;
4. An individual operating a sole person business from home;
5. A couple operating multi-person business from their home including deliveries, collections by customers and the storage of stock, and;
6. Bed and Breakfasts, Nurseries and Holiday Lettings.
Situations 1 & 2 are essentially residential and it is well-accepted that a tenant who is employed may bring home some work in the evenings without a presumption of business use. Situations 5 & 6 are more clearly businesses and 3 & 4 fall between the two.
Business tenancies
What happens if a residential tenancy becomes a business tenancy and what are the consequences?If the predominant use of a tenanted property becomes that of a business, then the tenancy will become a business one and covered by the provisions of the 1954 Act regardless of the terms of the tenancy agreement. This will mean fundamental changes in the legal relationship between landlord and tenant, including increased security of tenure which might make it difficult to remove the tenant if the landlord wanted his property back.
Until recently, the only way to be sure that this increased protection is avoided is to make application to the court. The county court has the power(6) to authorise, on the joint application of the parties, agreements for a term of years certain, which exclude the relevant sections of the Act(7). If this is not done, then the provisions of the Landlord and Tenant Act 1954 will apply.
An imminent change in the law might well provide a legally binding solution to the problem of mixed use tenancies. Under the new regulations(8) which will come into force on 1st June 2004, landlords and tenants would no longer have to obtain court approval for agreements to exclude security of tenure under the Landlord and Tenant Act. Instead, the landlord would have to serve the tenant a "health warning" notice at least 14 days before the parties are committed to the lease (for more details, see page 10).
Protection
Most standard AST agreements, including those provided by the Letting Centre, contain clauses prohibiting such activity. This clause reads as follows:-"Not to receive paying guests or carry on or permit to be carried on any business, trade or profession on or from the Property."
As a consequence working from home, particularly in examples 4-6 would result in the tenant being in breach and the landlord could seek possession of the property(9).
Recent cases have shown that the courts are reluctant to infer a change of tenancy status if the tenancy has been originally granted as a residential tenancy, and there has been no agreement to a change to business use.
In Brewer v Andrews(10), tenants used their rented house where they lived as a guest house. The tenancy was originally granted as an AST, with a clause restricting its use to a single private dwelling house. Because of this, the Court of Appeal held that the purpose of the tenancy agreement was clear to all parties and that the tenancy should operate under the rules for assured tenancies - despite surrounding circumstances indicating a significant proportion of business use.
Tax concessions
Another point worth noting is that there are useful tax concessions in this area. The classic scenario is the flat above a shop in the High Street, which is focused on in the recent Government tax changes - Capital Allowances for flats over shops(11). These changes apply to costs incurred since 11 May 2001. They enable people or companies who own or lease property to claim up-front tax relief on their capital spending, on the conversion or renovation of vacant or under used space above shops or other commercial premises. The conversion or renovation has to provide flats for rent.To qualify, the property must have been built before 1980, have upper floors that had been constructed for residential use(12), been unoccupied or used for storage for at least one year and the ground floor rated for retail or office use. The flats created must be self-contained, no more than four rooms (excluding kitchens, bathrooms and storage spaces) and available for rent. In addition, the rate of VAT on renovation and conversion of buildings for residential use has been reduced to 5%(13).
Planning controls
Planning controls may well affect the sorts of live/work occupation that can take place in a property.You will need to make a planning application if you wish to divide part of your house for separate occupation, say as a flat or bed-sit, but letting rooms to lodgers is acceptable without permission. Similarly you may need planning permission to divide off part of your house for business premises or commercial use. The use of a garage for example as a commercial workshop may require planning permission whereas using it to repair your own car would not.
Generally, planning permission will probably be required if :-
References
1. Getting on with the Homework, Search 37, Summer 2002.
2. Housing Act 1988, Sch 1, para 4
3. Landlord and Tenant Act 1954 s.23
4. Tomkins v Basildon District Council 2002 EWCA Civ 876, Letting Update Journal Jan. 2002 page 21.
5. Royal Life Saving Society v Page [1978] 1 WLR 1329.
6. Landlord & Tenant Act 1954, section 24(2)(b).
7. ss24-28.
8. Regulatory Reform (Business Tenancies)(England & Wales) Order 2003 SI 3096.
9. Ground 12, Sch 2 Housing Act 1988
10. Brewer v Andrews, Court of Appeal, February 17 1997.
11. IR2007 available from your local tax office, or on the IR website.
12. but not more than 5 floors.
13. For more information see www.hmce.gov.uk/forms/notices/bn85-01.htm