Back to Basics: Opposing lease renewal on redevelopment grounds

Let’s go back to 1954 – the year that saw the end of food rationing in the UK, almost a decade after the end of the Second World War, Bill Haley and His Comets record Rock Around the Clock and, of course, the Landlord and Tenant Act 1954 came into force. The Act was introduced to provide business tenants with “security of tenure” by giving them the right to continue in occupation after the end of the contractual term on the same terms as their current lease, as well as the right to acquire a new lease. The aim of the Act was to provide businesses with greater protection from eviction.  A tenancy protected by the Act continues until terminated by one of the methods prescribed by the Act. Where the Act applies, it is therefore much more difficult for a landlord to recover possession of a premises, which can have significant implications when a landlord decides it wants to redevelop a site. When does the Act apply? The Act applies if the following conditions are met:  The tenant occupies the premises for the purpose of its business; The premises are occupied by way of a lease, whether express or implied (not a licence); and The lease is not “contracted out” of the Act (whether the lease is to be protected under the Act is a commercial negotiation point at heads of terms stage). There are some limited exclusions, including agricultural tenancies and tenancies for a term of less than six months. “I’m a landlord but my tenant has security of tenure under the Act – how do I recover possession?” To terminate a protected tenancy, a landlord must serve a notice under section 25 of the Act specifying a proposed termination date and citing one or more of the statutory grounds of opposition set out in section 30(1). Broadly speaking, these are as follows:  (a) Premises are in disrepair (discretionary – no compensation) (b) Arrears of rent (discretionary – no compensation) (c) Other breaches of covenant (discretionary – no compensation) (d) Landlord can provide suitable alternative accommodation (mandatory – no compensation) (e) If the tenancy was created by a subletting of part (discretionary – compensation) (f) Landlord’s intention to redevelop (mandatory – compensation) (g) Landlord’s intention to occupy (mandatory – compensation). A section 25 notice cannot propose a termination date which predates the contractual expiry date of the lease and must provide six to 12 months’ notice. Any ground of opposition must be put forward in good faith – a landlord should not oppose the renewal of a tenant’s lease for purely tactical reasons (to do so would put the landlord at risk on costs in any subsequent litigation).  While a landlord can specify more than one ground of opposition in its section 25 notice or counter-notice (in circumstances where a tenant has served a section 26 request for a new lease), once a ground of opposition has been specified, it cannot be changed for an alternative ground and further grounds of opposition cannot subsequently be raised.  Landlords and tenants alike should note the distinction between mandatory and discretionary grounds of opposition. Discretionary grounds, as the name suggests, confer discretion on the court as to whether to grant a new lease, even where the ground of opposition is satisfied. Mandatory grounds, on the other hand, leave the court no choice – where the ground of opposition is satisfied, the court must refuse to grant the tenant a new lease. Ground (f) – landlord’s intention to redevelop  Under ground (f), on the termination of the current tenancy, the landlord must intend to: demolish or reconstruct the premises comprised in the tenant’s holding or a substantial part of those premises; or  carry out substantial construction work on the premises comprised in the tenant’s holding or part of those premises. The landlord must also show it could not reasonably carry out the relevant work(s) without obtaining possession of the premises.  Intention The onus is on the landlord to prove it has the requisite intention to redevelop the premises. Intention must be proven at the trial date, not before. That said, the sooner a landlord can gather evidence to support its intention, the more likely it is to satisfy a tenant that it will succeed at trial, which could avoid the costs of protracted litigation.  To establish the requisite intention, a landlord must show it has a firm and settled intention to carry out the works. The more advanced the landlord’s redevelopment plan is, the better the landlord’s position to show it has moved “out of the zone of contemplation” and into “the valley of decision”. A landlord can evidence intention by collating the following: proof of decision-making (eg board minutes), funding, detailed plans/drawings/specifications, planning applications/permissions, relevant third-party consents (eg in relation to rights of light/rights of way) tenders for works, building contracts, obtaining vacant possession of other parts of the proposed development, business plan for future use of the site, etc. Ability A landlord must also show it has a reasonable prospect or a “real chance” of carrying out the works (ie there are not too many hurdles to overcome) and that it is pursuing a course of action that a reasonable landlord would take.  Evidence of ability can be demonstrated through expert opinions explaining how specific problems or objections can be overcome (eg in relation to planning), along with proof of viability, permissions and consents, proof of finance, contracts, etc. Timing The proposed works must be started within a reasonable time of the end of the tenancy. There is no prescribed time period under the Act. Generally, a reasonable time has been held to be around three to six months after a court order terminating the existing lease, but this depends on the specific facts and surrounding circumstances.  Statutory compensation If a landlord successfully opposes a lease renewal under ground (f), the tenant will be entitled to statutory compensation on vacating the premises (calculated at rateable value or 2 x rateable value if the tenant (or any predecessor carrying on the same business) has been in occupation for 14 years or more).  Where a landlord is dealing with numerous protected tenants at a proposed redevelopment site, this can involve significant sums in compensation. Landlords and their professional advisers should factor this into their budgets for the project (along with additional premiums where early surrenders are sought). Watch this space…  On 28 March 2023, it was announced that the Law Commission of England and Wales would be reviewing the Act to explore problems with the current law, with a view to “developing a modern legal framework that is widely used rather than opted out of, and that helps businesses to grow and communities to thrive”.  A consultation paper is expected to be published by December 2023. The key objectives appear to be: modernisation, bearing in mind the significant changes the bricks and mortar landscape has seen in recent years; ensuring legislation is clear and fit for the modern market, while considering government objectives such as levelling up and net zero; and supporting the efficient use of space and reducing the number of vacant properties on the high street. It remains to be seen what impact the consultation will have on business tenancies generally, and whether there will be any changes to the means by which landlords can recover possession of premises from protected tenants.  Key case  S Franses Ltd v Cavendish Hotel (London) Ltd [2018] UKSC 62; [2019] EGLR 4 added another limb to the intention test. Here, the landlord’s proposed works were designed purely to satisfy ground (f) as a means of getting rid of the tenant – the works had no practical utility. This was not sufficient to satisfy ground (f) and it was held that a landlord’s intention to carry out works must not be conditional on whether the tenant was seeking a new tenancy. The acid test is whether the landlord would carry out the same works if the tenant left voluntarily. If works are only being carried out for the purpose of obtaining vacant possession, this does not prove a firm and settled intention to carry out works and ground (f) will not be satisfied. This is an additional evidential hurdle which a landlord must now overcome. Tactics/practical points to use when dealing with ground (f) For landlords: Seek professional advice early, particularly if served with a tenant’s section 26 request to ensure the opportunity to serve a counter-notice within the two-month deadline is not missed. If it is missed, the landlord cannot oppose the grant of a new lease. Seek professional advice if there are plans to sell the property to a developer conditional on vacant possession. It is the landlord at the date of the trial that should have the relevant intention to develop. Gather a package of evidence early. If a tenant is well advised, it could force a landlord to court quickly if it believes the landlord will not be able to prove the necessary intention. Consider relying on other grounds of opposition in addition to ground (f), where applicable. For example, could suitable alternative accommodation be offered to the tenant under ground (d)? If so, (and if established at trial) a landlord would not have to pay statutory compensation. If a tenant accepts that a landlord will be able to satisfy ground (f) at trial, parties may be able to negotiate an early surrender of the lease, subject to the landlord paying the tenant the compensation it would be entitled to if the matter proceeded to trial (and, if the tenant was well advised, an additional surrender premium). Even where a tenant considers that a landlord will be able to satisfy ground (f) at trial, it may still object to termination to prolong its business occupation where its profits outweigh the costs risk of losing at trial. This has the potential to impact significantly on the vacant possession strategy and should be factored into proposed timescales. For tenants: Seek professional advice early if a landlord opposes the grant of a new tenancy based on ground (f). Test the landlord’s intention to redevelop early on – request information to evidence intention (see main text) and look for weaknesses in the landlord’s evidence/potential obstacles that may not be surmountable. Try to obtain information on the landlord’s desired timescales, ie when does the landlord need vacant possession by and when does the landlord plan to commence works? This can inform litigation strategy. Consider timings in light of the tenant’s commercial objectives and profitability of the premises – is it better to drag matters out to get as long as possible in the premises or press ahead with litigation in the hope that the landlord will not be able to establish its intention to redevelop? Speak to other tenants that may also be affected by the landlord’s proposed redevelopment and seek information on their discussions/agreements. Consider the importance and profitability of the premises to the business and weigh up against the strength of the landlord’s evidence, practicalities of continuing to trade if the site is being cleared anyway, the statutory compensation available and legal costs to trial. Consider negotiating a surrender for a large premium. Jessica Crowther is an associate at Brabners Next time in Back to Basics, we start a two-part mini series on easements by Oskar Musial Image © Francisco Andreotti/Unsplash