Get it in writing

    Gentlemen’s agreements are common in the field of land agency but there are negatives as well as positives to consider before entering into one.

    Gentlemen’s agreements are common in the field of land agency. Such agreements usually work smoothly, especially when both parties know each other well: where amicable relations are maintained, the likelihood of problems arising is minimal and the agreement qualifies as a verbal license.

    Sometimes, however, things go wrong, with costly — and sometimes disastrous — consequences. In such situations, the lack of a written agreement makes it difficult for either party to get out of the arrangement, and the rights and liabilities of both parties can become very opaque. The resulting problems range from loss of rent to a potentially expensive capital tax problem, depending on the nature of the occupancy under dispute.

    Informal arrangements, typically grass-keep agreements or agreements to occupy buildings, tend to roll on from year to year. Perhaps there was an original agreement covering the first year, and the parties have wrongly assumed that it remains valid in subsequent years. But continuing the agreement can unwittingly create a secure tenancy, with serious implications for the owner or his estate.

    One of the worst scenarios can occur when the property owner dies. Unless meticulous records have been kept, or another family member is familiar with the agreement, it is extremely difficult for the executors to ascertain what rent or fees have been paid, when the agreement is to end, or even who the other party is! Such cases often rely on information supplied by the occupier — and an unscrupulous occupier could use this to his own advantage.

    Furthermore, the nature of an agreement can have significant ramifications for the property’s Inheritance Tax status. The onus is on the taxpayer to prove what sort of tenancy was in place at the date of death; this can prove very difficult if there is no written record.

    Written agreements are also invaluable if a property occupied by a third party is to be sold. Sales are often stalled or prevented by an occupier claiming a secure tenancy where there is no written agreement to prove otherwise. Moreover, the sale value of a property with vacant possession can differ significantly from one subject to tenancy.

    All these difficulties may be easily be avoided by putting in place a simple licence or tenancy agreement prior to occupation which can be renewed relatively quickly and cheaply should the occupation continue beyond the initial term. As always, take professional advice to secure your position.