This interesting case, recently decided at the County Court, addresses the question of whether the inclusion of a redevelopment break clause in a renewal lease can be justified and, if so, how far into the term of the new lease should such a break be exercisable. Whilst each case will turn on its facts, this decision will be welcomed by landlords who have redevelopment aspirations, whilst highlighting the defences a well-armed tenant may raise to prevent the inclusion of a redevelopment break in a renewal lease pursuant to the Landlord and Tenant Act 1954 (1954 Act).
The case also serves as a cautionary reminder of the need for all parties to put in place robust systems for the receipt and acknowledgement of notices within large organisations.
The Facts
The lease of retail premises in Willesden, London (Premises), granted in December 2000 (Lease), was assigned to B&M Retail Ltd (Tenant) in 2015. The defendant, HSBC Bank Pension Trust (UK) Ltd (Landlord) acquired the Premises in 2007.
Under the 1954 Act, a tenant of business premises is entitled to apply to the court for a new tenancy of those premises by serving a notice under section 26 of the 1954 Act (s26 Notice). Such an application may be opposed by a landlord, relying on one of the grounds set out in the 1954 Act. One of these grounds (under section 30 (1) (f)) includes a landlord’s intention to demolish or reconstruct the premises.
If a landlord does not oppose a request for a new tenancy contained in a s26 Notice within a prescribed time, then the terms of the renewal lease are to be agreed between the parties and, in the absence of agreement, in respect of the terms, the matter can be referred to the court for determination.
In 2019 the Landlord had entered into an agreement for lease with Aldi (AFL), whereby the Landlord agreed to grant a lease of the Premises to Aldi, conditional on the Landlord obtaining vacant possession and satisfaction of the “planning condition.” If these conditions were not satisfied by a longstop date in February 2025, either party would be entitled to terminate the AFL.
The AFL also required Aldi to carry out extensive physical works to the Premises at its own cost (Landlord’s Works).
To this end, in May 2021, the Landlord sought to terminate the Lease under ground 30 (1) (f), by serving a notice on the Tenant under section 25 of the 1954 Act.
It later transpired however, that the Tenant had already served a s26 Notice on 25 January 2021 but, in what the court referred to as a “fortunate break” for the Tenant, whilst the s26 Notice was received into the Landlord’s post room, as a result of administrative failures caused by the coronavirus pandemic, it had never made it into the hands of the correct person.
The Landlord was therefore out of time to oppose the grant of the new lease and the Tenant was, in accordance with the provisions of the 1954 Act, entitled to a renewal lease.
The parties were subsequently unable to agree the terms of the new lease. The Tenant was proposing a 10 year term and the Landlord, an 18 month term with a landlord’s redevelopment break clause, exercisable on not less than 6 months’ notice. The Tenant made an application to the court for the purpose of settling the terms of the new lease.
The Decision
Under section 33 of the 1954 Act, in the absence of any agreement, the duration of the new tenancy is to be “such tenancy as may be determined by the court to be reasonable in all the circumstances,” subject to a maximum term of 15 years.
Under section 35 of the 1954 Act, again in the absence of agreement, any other terms of the new tenancy “may be determined by the court; and in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances.”
The court stated that, although it was being asked to settle both the term and the question as to whether a redevelopment break clause should be included, the “real issue” before it was whether there should be a redevelopment break clause. If it was accepted that a redevelopment break should be included then this would make the term of the new lease less important.
The court looked at various authorities, and quoted the decision in the leading case of National Car Parks Limited v The Paternoster Consortium [1990] 1 EGLR 99, which it said was instructive:
”if there is a real possibility (as opposed to a probability) that the premises will be required for reconstruction during the continuance of the proposed new tenancy it is right to include in the terms of the new tenancy a break clause which will enable such reconstruction to take place.”
Given the existence of the AFL, there was no dispute as to whether the Landlord intended for the Landlord’s Works to be carried out. The case hinged therefore on whether there was a “real possibility” that the Landlord would be successful in obtaining planning permission for the Landlord’s Works.
The court looked closely at the evidence of the parties’ planning experts in this regard. The Tenant’s expert contended that the application for planning permission for the Landlord’s Works will be refused since it ran contrary to the various planning policies in the locality. The Landlord’s expert however believed there were a number of material considerations, which outweighed the conflicts with the local plan, and believed the application will be approved.
The judge preferred the Landlord’s expert’s evidence.
The court did accept that the consequences of a break clause would act harshly on the Tenant who will inevitably suffer some loss as a result of the decision but held that this was not an overriding consideration. Its conclusion was that it was therefore appropriate to include a landlord’s redevelopment break clause in the renewed lease.
In deciding when the break should be operable, the court considered the arguments put forward by the tenant, including the impact on its business and its inability to find a suitable alternative location but held that the break should be operable immediately, on 6 months’ notice, to give the Landlord every chance to achieve its redevelopment aims.
Finally, as to the length of the term, the court considered the 18 months proposed by the Landlord to be too short and held that the term should be 5 years. This was considered reasonable in the circumstances, giving the Tenant some security and offering the Landlord some protection against the diminution in value of the Premises.
Commentary
Whilst this was a County Court decision, which is potentially open to challenge, the decision will be well received by landlords who have redevelopment plans for portfolios occupied by protected tenants. Whilst each case will depend on its facts, the decision follows the principle that the court will only upset a landlord’s redevelopment ambitions if there is a major factor which points the other way.
The case also underlines, once again, the importance for both landlords and tenants to ensure that there are stringent processes in place for the receipt and acknowledgement of notices, whether served under the 1954 Act or otherwise.
