Tim Allen explains one ground on which a landlord may defeat an application for a new lease from a tenant with the benefit of security of tenure
The rights granted by the security of tenure provisions of the Landlord and Tenant Act 1954 impose restrictions on the freedom of landlords in relation to their property. There are limited grounds prescribed by statute on which a landlord can oppose a claim for a new lease made by a tenant that benefits from security of tenure. One is that set out at section 30(1)(f) which permits a landlord to defeat an application for a new lease from a tenant with the benefit of security of tenure where:
“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.”
The financial consequences of successfully relying on ground (f) can be significant for a landlord that wishes to develop or a tenant seeking to remain in occupation for the purposes of a long-established business. Breaking down the requirements of ground (f), and understanding how the factual matrix fits within those requirements, is a vital first step for both parties.
To establish if a landlord will succeed in defeating the tenant’s claim, three basic questions must be asked: does the landlord’s proposed development comprise qualifying work for the purposes of the Act; does the landlord have the requisite intention; and is the tenant able to rely on the provisions of section 31A?
The court has no discretion in ground (f) proceedings. If the landlord has shown that it has the necessary intention to carry out qualifying works, and section 31A cannot be relied on, the landlord will have defeated the tenant’s right to claim a new lease.
The works
The types of work that are recognised by the Act are set out below. In each case the work must be carried out to the whole of the tenant’s holding, or a substantial part, at the end of the current tenancy, or within a reasonable time of it.
? Demolition: there is an argument that an internal demise (ie one that excludes structural parts of the building of which the holding forms part) can never be the subject of demolition works. However, in Pumperninks of Piccadilly Ltd v Land Securities plc [2002] EWCA Civ 621; [2002] 2 EGLR 147 it was held that demolition of the structural walls supporting the internal demise was qualifying work for the purposes of ground (f).
? Reconstruction: this involves interference with the structure of the holding and replacement of it in a different form.
? Substantial works of construction: this involves the creation of something new rather than alteration of existing works. Any works that a tenant is required to carry out under the terms of its own lease (eg the obligation to comply with statute) will be excluded from the assessment of qualifying works. What qualifies as “substantial” works is a question of fact in each case.
The landlord’s works must require both physical and legal possession of the holding. The requirement for physical possession is a question of fact to be determined by the court, but the requirement for legal possession requires a consideration of the landlord’s existing rights under the relevant lease.
Most commercial leases will include a reservation of a landlord’s rights to carry out development works and the wording of such a reservation must be considered carefully. Any works that the landlord already has the right to carry out under such a reservation will be excluded from the assessment of qualifying works under the Act. The more extensive the interference caused by the landlord’s works, and the longer their duration, the harder it will be to convince the court that the parties intended the works to be permitted by the reservation in the lease.
The landlord’s intention
The test for landlord’s intention under ground (f) applies at the date of the court hearing and has two limbs: has the landlord shown a firm and settled intention (the subjective test); and does the landlord have a reasonable prospect, or a real chance, of achieving that intention (the objective test)?
The landlord will need to produce evidence of its state of mind in order to satisfy the subjective test. For a company, the evidence may comprise board minutes approving the development together with witness statements or oral evidence. Cunliffe v Goodman (1950) 155 EG 202 determined that the landlord needed to show that it had moved out of the “zone of contemplation” and into the “valley of decision”.
The objective test will require the landlord to produce evidence of the preparations that it has made for the development (eg planning applications, obtaining vacant possession of the development site, engagement of consultants or arranging financing) and the outcome will depend on the facts of each case.
Although the burden of proof rests with the landlord, the court has shown flexibility when considering if the landlord has met the intention test. For example, in Capocci v Goble [1987] 2 EGLR 102 the court held that the landlord had satisfied the test despite funding having only been agreed in principle. In Dolgellau Golf Club v Hett [1998] 2 EGLR 75, a landlord succeeded on the basis of sketch drawings showing the proposed development despite a financial analysis of the costs not having been carried out.
The closer the landlord is to being able to commence work, the more likely it is that it will be in a position to produce evidence to satisfy the subjective and objective tests of intention. Until recently there was doubt as to whether a tenant could exploit this timing issue by making an application for summary judgment so as to bring forward the date on which the landlord’s intention is tested. However, in Sommerfield Stores Ltd v Spring (Sutton Coldfield) Ltd [2010] EWHC 2084 (Ch), it was held that the relevant date for testing the landlord’s intention was the date of the substantial hearing.
Where a landlord is not yet in the final stages of preparations for development, or concludes that it may be unable to successfully defend a claim for a new lease on the basis of ground (f) it may be sensible to offer the tenant a short term lease with landlord break rights as part of any settlement proceedings.
The Growth and Infrastructure Act 2013 has made a number of changes to the planning regime in order to simplify the planning process. This has led developers to reconsider schemes that were previously unviable on planning grounds. The change in planning legislation could mean that some landlords now have a “real prospect” of achieving their intention to carry out qualifying works and should look again at their chances of successfully relying on ground (f).
Section 31A
If a tenant is willing to accept a new lease that reserves rights that will allow the landlord to enjoy the access and facilities necessary to complete the development, or a lease of an economically separable part of the holding, then section 31A will allow the tenant to defeat a landlord seeking to rely on ground (f).
Without qualification, section 31A would tilt the playing field substantially in favour of the tenant that wishes to remain in occupation, or at least wishes to threaten to do so in order to maximise its bargaining position in any settlement negotiations with the landlord. The court will consider if the landlord’s works can reasonably be carried out without obtaining possession of the premises and also if the consequential interference with the tenant’s use of the premises during the works will be substantial in extent and time. The extent of interference will be objectively considered and will not be satisfied simply because the actual tenant is willing to tolerate significant interference in order to retain an interest.
As developers start new projects in an improving market, tenants may see an increasing number of applications for new leases opposed on under ground (f). Tenants with the benefit of security of tenure are advised to consider the basis of the landlord’s claim carefully.
There may be a strategic advantage in pursuing a lease renewal where the landlord is known to intend to carry out development. If unsuccessful, there is an entitlement to statutory compensation equivalent to the rateable value of the interest where the tenant has been in occupation for less than 14 years or double that rateable value where the tenant has been in occupation for more than 14 years. Landlords or developers may well be prepared to offer more in order to convince a tenant with a strong case to relocate without going through the full court process.
Why this matters
Ground (f) is significant for both landlords and tenants in that it provides landlords with increased freedom in dealing with their property. This freedom may become more valuable in the light of recent changes to the planning process and improving market conditions in which landlords may consider that there are benefits to redeveloping a property with a view to reletting it on better terms.
Tenants with security of tenure are advised to consider the basis of the landlord’s claim and their own rights carefully, but they should also be aware of other tenants who may be in a similar position. In the case of a multi-let building, it is often the case that a number of tenants are faced with hostile section 25 notices at the same time. Co-ordinating responses can ensure that valuable information is shared and improves the position of all tenants.
It is always open to a tenant to receive statutory compensation. Compensation equivalent to the rateable value of the interest is available where the tenant has been in occupation for less than 14 years or double that rateable value where the tenant has been in occupation for more than 14 years. Landlords or developers may be prepared to offer more in order to convince a tenant with a strong case, or who has an influential position with other occupiers of the building, to relocate without going through the full court process.
The key to successfully defeating a ground (f) claim often lies in market knowledge. Tenants and their advisers should seek to understand as much as possible about the landlord, its position and the proposed scheme so as to establish if the proposed development has a real chance of success or if the landlord is simply “testing the water”. If that information is not immediately available, tenants should keep digging.
Further reading
Woodfall, Landlord and Tenant, chapter 22 [105–118], Thomson Reuters
Reynolds & Clark, Renewal of Business Tenancies, chapter 7, Thomson Reuters
Fife, Renewing Business Tenancies, chapters 4 and 10, Jordans
Clark, Tactics and evidence in 1954 Act lease renewals
Tim Allen is an associate at Bristows
