A tenant occupying premises for business purposes will (in general terms) be entitled, on expiry of its lease, to stay in the premises or to apply for a new tenancy for a further period on substantially similar terms to its existing lease.
The right is enshrined in statute (specifically the Landlord and Tenant Act 1954) which sets out provisions dealing with the creation of this right, the circumstances in which the parties can ‘contract out’ of it before a lease is entered into, and finally the circumstances in which a landlord can seek to prevent the tenant exercising the ‘right to renew’. Those circumstances are, understandably, fairly restricted, and leaving aside ones which relate in some way to default by the tenant, the others rely on the landlord’s need to get back its building for its own purposes. One of these (abbreviated by reference to the paragraph number in s.30 of the Act and known as ‘ground (f)’) reads as follows:
“that on the termination of the current tenancy the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises or to carry out substantial work of construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding.”
Whilst cases have considered the extent of works necessary to meet the test in this paragraph, an equally contentious issue is the question of what the word ‘intends’ should mean (in a legal sense) for determining whether or not the landlord meets the test. The subject has recently been considered again and the Supreme Court has tried to clarify the term once and for all.
The facts of the case are fairly straightforward.
- The landlord in this case (strictly speaking the holder of a long lease of the whole building) was seeking to get back control of a part of the building sublet to an occupier using it as an art gallery, showroom and archive.
- The landlord, therefore, set about proposing a scheme of works to be carried out in the tenant’s leased area that were sufficiently disruptive that the tenant would have to move out in order for the landlord to carry them out (so meeting the last part of ground (f)).
- However, it was also acknowledged that the landlord’s sole purpose in carrying out the works (which had been costed at nearly £780,000 plus VAT) was to frustrate the tenant’s attempts to secure a new lease. It was acknowledged on all sides that a significant element of the works were, objectively, useless. At least in the sense that they would do nothing to enhance the building (in fact in some instances they would positively make them harder to occupy). But they would be substantial, and in the lower court the judge found that there is nothing in the wording of ground (f) that relates to either the landlord’s motivation or any inherent value in the work being carried out.
- The landlord had also given an undertaking to the court that if the court rejected the tenant’s application for a new lease then it would carry out the works in its scheme. This is a common practise in cases on ground (f) to prevent the landlord from ‘changing its mind’ after securing vacant possession of the building. The undertaking gives the court the power to compel the carrying out of the works and prevent a landlord trying to abuse the purpose of ground (f).
At first instance the court came down on the side of the landlord. There was nothing in the wording of ground (f) that suggests that the intention needs to be a ‘proper’ one (at least in the sense that the doing of the works may be motivated by a desire to remove the tenant). A court can look at the landlord’s motivations but only to the extent that these may colour whether or not the intention is a genuine one; it cannot be fanciful (hence the practice of requesting an undertaking to carry out the works).
On appeal the Supreme Court has reversed that decision; in effect entitling the tenant to its renewal lease. In a very careful set of judgments their lordships considered the various cases on intention. The conclusion they reached was that for an intention to be genuine it must be independent of any conditionality, although they endorsed the view that motivation is not of itself directly relevant. In this particular case, whilst the landlord had given an undertaking to do the works, this was dependent on the court finding in its favour. In other words, if the tenant had chosen to leave voluntarily then the landlord would not have carried them out (because in truth it neither needed nor wanted them). Giving the leading judgement Lord Sumption said that: “The acid test is whether the landlord would intend to do the same works if the tenant left voluntarily”. Because the landlord had effectively made some of the works conditional on securing the tenant’s removal, the court found that the necessary intention was not there – because such other works as the landlord would have carried out regardless would not require the tenant to vacate the building. In this case it was clear that the landlord did not unconditionally ‘intend’ to carry out the necessary works; in other cases it may be less clear (particularly where there were works which would be carried out ‘come what may’, but others which may depend on the tenant’s refusal to give up occupation). Lord Sumption felt that it would be possible for a judge to be able to find a way through the facts in any given case to determine the genuineness of a landlord’s intention.
So what can we take away from this case?
The courts are still very much aware of the commercial value of property interests. Leaving aside the legal costs of fighting the case on both sides, the landlord had been prepared to throw in excess of £1m (between the cost of works and the statutory compensation that is payable to secure tenants whose leases are not renewed where a landlord’s claim is successful) in order to get back possession of the whole building. That was not enough to persuade a court its intention was genuine or that the tenant should be otherwise forced to give up valuable legal rights.
Landlords looking to rely on ground (f) in future will need to prepare their cases even more thoroughly. It might be easy to scoff that if the landlord hadn’t been so honest with their intentions then they might have won. Whilst the facts of this case are unusual it would be dangerous to assume that a judge would not be able to see through a try-on by a landlord for an ulterior purpose. We can expect a more forensic examination of the motivation and justification for a landlord’s actions in future.
It’s not all bad news for landlords. Whilst the courts will certainly test the genuineness of a landlord’s intention following this decision, that is not to say that they will try to read into the motivation behind it. Their lordships confirmed that it is not the place of ground (f) to enquire whether the works are strictly necessary, nor should there be consideration of whether they could be carried out in a different way without the tenant having to give up occupation. In other words, landlords do not have to show that they have exhausted all reasonable alternatives before relying on ground (f). But they will have to show that they intend to do what they say they will, come what may.
The content of this article is for general information only. For further information please contact Marcos Toffanello or a member of Birketts’ Commercial Property Team.
This article is from the winter 2018 issue of Room with a View, our newsletter aimed at professionals within the property industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at January 2019.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2019.