Play your cards (sufficiently) right - the need for landlords to show their hand

A recent County Court decision, in England, in respect of an unopposed lease renewal decision has provided a useful reminder that the Court is unlikely to include additional break rights in favour of a landlord in a renewal lease unless the landlord is able to show that its future plans (in this case, occupation) are “sufficiently on the cards”.

Part II of the Landlord and Tenant Act 1954 (the “Act”) provides a tenant with security of tenure in respect of a commercial property. Security of tenure gives the tenant a right to a new lease at the expiry, or break, of their lease.

Unless the lease is expressly, and properly, ‘contracted out’ of the provisions of the Act, a landlord must establish one of the seven grounds contained in s.30(1) of the Act. These are:

a) the tenant has failed to comply with its obligations in relation to repair and maintenance under the current lease resulting in the property being in disrepair;

b) the tenant has persistently delayed in paying of rent;

c) the tenant has been in (and/or continues to be in) substantial breach(es) of other terms of the existing lease;

d) the landlord is able to provide suitable alternative accommodation;

e) the tenancy was created by a sub-letting of part of the property;

f) the landlord intends to demolish or reconstruct (redevelop) the property and it is not possible without the landlord recovering possession; and

g) the landlord intends to occupy the property or part of the property for the purposes of its own business or as its residence.

If a landlord is able to successfully rely on grounds (a) - (c) of s.30(1) of the Act, the tenant will not be entitled to any compensation. However, if a landlord seeks to oppose a new lease on grounds (d) - (g), the tenant could be entitled to statutory compensation (up to twice the property’s rateable value).

Where a tenant obtains a renewal lease on the expiry of its current lease, the Court’s starting position is that it will ‘have regard’ to the terms as the existing lease. If either party wants to change those terms, without agreement, they have the onus to justify the change.

In recent years, the focus of disputes in relation to s.30(1) has been on ground (f), the “redevelopment ground”. However, this case focuses on ground (g), the “occupation ground”. 

Background

The leases of BMW’s flagship showroom store in Park Lane, London expired in May 2022 and BMW sought renewal of those leases under the Act. The store is made up of four different units, under four separate leases, which together make up the showroom.

The landlord did not oppose the grant of the new leases to BMW. However, the landlord sought a break option be included in the renewal lease for one of the units (called “Central”) exercisable by it at any time on six months’ notice, from and including the second anniversary of the term up to and including the fifth anniversary of the term. As the name suggests, the relevant unit was in the middle part of the showroom.

It was accepted by the landlord that, if the break clause was included, they would still need to demonstrate the “intention to occupy” in accordance with ground (g) at the time they exercised the break clause. Essentially, as the lease renewal was unopposed, the question was not whether the landlord currently had the intention now, but rather if they would be able to establish the intention when exercising the break option.

Judgment

The Court reiterated that its function is to strike a reasonable balance between the rights of the landlord to use their premises and the provision of a reasonable degree of security of tenure to the tenant. Ultimately, the balance could only be determined upon an examination of the evidence.

When determining the extent of the “intention to occupy”, the Court is more likely to grant the landlord a break clause if they can establish that there is a possibility that the landlord will have a bona fide decision to operate a break clause.

The landlord’s idea for occupation was “vague and unsupported”. The landlord had argued that it had not yet undertaken formal plans as any work on plans before having the certainty of a break clause would be “entirely wasted”.

The Court reinforced the principle that the works had be “genuine and workable”, which was not apparent in this case. In addition, the impact on BMW, from having the middle of its showroom subject to a break clause, did not make “practical or commercial sense”. 

The full judgment can be seen here.

It is important for landlords to remember that the onus is on them when seeking to include a landlord break clause into a renewal lease under the Act. Therefore, in order to persuade the Court to grant such a term, the landlord will need to provide evidence that they have workable and genuine plans - not just a “speculative” proposal.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Property and Commercial Litigation practice.