Break clauses in business lease renewals

Key points The 1954 Act is not intended to “petrify” the terms of the existing tenancy The party arguing for change must justify it by reference to the site or premises The change must be fair and reasonable in all the circumstances In Kwik-Fit Properties Ltd v Resham Ltd [2024] EWCC 4, the Newcastle County Court has provided some salutary reminders of the principles for determining the terms of an unopposed business tenancy renewal. Background The claim concerned land and buildings on an out-of-town industrial estate in Washington, Tyne and Wear, of which Resham was the freehold owner. Kwik-Fit occupied the premises for car repair and fitting services under a 25-year lease granted in 1996, which was continued under section 24(1) of the Landlord and Tenant Act 1954. The initial rent under the lease was £35,000 per annum with five-yearly upward-only rent reviews. No reviews had been implemented. The parties agreed that a new lease for a 15-year term should be granted, but could not agree on three issues: i) Should there be a tenant’s break clause exercisable every five years? ii) Should the tenant’s contribution to maintenance of an access way be capped? iii) What rent should be set? Tenant’s break clause Section 35 of the 1954 Act gives the court a wide discretion to set the terms of the proposed lease. The court must have regard to the terms of the current tenancy and to all relevant circumstances. It is for the party seeking a change to the current tenancy to establish that it is fair and reasonable and there must be a good reason to impose the new term. A shift in the apportionment of risk in return for compensation is insufficient: O’May v City of London Real Property Co Ltd [1977] 1 EGLR 76. It is well established that it is not the policy of the 1954 Act to give security of tenure to a business tenant at the expense of preventing development: Davy’s of London (Wine Merchants) Ltd v City of London Corporation [2004] 3 EGLR. The landlord’s desire to redevelop and the tenant’s wish for a reasonable degree of security have to be balanced. The test is whether there is a realistic possibility, rather than probability, that redevelopment will be practicable within the term of the lease. That test has been adopted in cases concerning tenant’s break clauses – is there a realistic possibility that the tenant would need to vacate at the end of the break period? The tenant will need to justify the incorporation of the break by reference to factors affecting the demised premises and not general policy considerations. Kwik-Fit sought an unrestricted break clause to provide flexibility in view of ongoing operational changes in its business. It claimed that its policy was to take 15-year or 10-year terms with five-year breaks. This reflected market practice in the quick-fit car maintenance industry generally. The tenant could identify issues – creeping encroachment of residential development, “green” policies, the need for more storage – which might impact generally on its business, but nothing that was tied to this particular site or premises. The court was prepared to accept that Kwik-Fit’s starting point was to seek leases of five years or multiples of five years, but it frequently gave way to other factors for commercial reasons. Since March 2017: of 12 new leases entered into, four were of 10 years and five of 15 years; only four had break clauses every five years; and four had no break clause at all. Kwik-Fit had entered into 26 new leases of existing premises from another group company in March 2020. Each lease was for 15 years with no break clause. of 80 lease renewals, 48 did not have five-year breaks. There was also no evidence that leases with five-year breaks was market practice in the quick-fit car maintenance industry generally. Lease length and the existence of break clauses was very much a commercial decision for landlord and tenant. Conversely, there was evidence that a tenant’s break clause would have a negative impact on the landlord’s reversion, which made sense: the tenant could escape the deal on an unrestricted basis but the landlord could not. Compensation in rent was a neutral issue whether or not the break was included. Kwik-Fit had not discharged the burden of proof. It was not fair and reasonable to include a tenant’s break clause. Costs of maintenance The existing lease provided for Kwik-Fit to pay 33.3% of the landlord’s reasonable and proper cost of the maintenance, lighting and cleaning of the access way to the public highway, but permitted Resham to apply another percentage if it considered it fair and reasonable to do so. A change in ownership since the lease was granted limited Resham’s liability to a third of the costs, but that did not mean that Resham would not itself incur liabilities. The court refused to cap this liability as the charge could go down as well as up. The rent Under section 34 of the 1954 Act, the rent is that which, having regard to the terms of the tenancy, the holding might reasonably be expected to be let in the open market, disregarding the tenant’s occupation, goodwill and certain improvements. The court was satisfied that the landlord had not triggered rent reviews under the current lease because either a higher rent would not be achieved or the position was uncertain. The landlord sought a rent of £46,250; the tenant, a rent of £27,400. The court gave greater weight to comparables relating to quick-fit premises and recent lettings in fixing the annual rent at £39,300. Louise Clark is a property law consultant and mediator