Paul Tonkin considers the tactics and pitfalls involved in obtaining possession for redevelopment under the Landlord and Tenant Act 1954
An on-going shortage of property supply, particularly residential, has put redevelopment back at the top of the agenda for many landlords looking to maximise investment value. While most will be all too familiar with potential delays and complications in the planning process, they should not overlook the need to obtain possession from any existing tenants at the property they wish to develop.
A landlord may be fortunate enough to have a building with tenancies that are all about to expire and are contracted out of the Landlord and Tenant Act 1954 (“the Act”). Sadly, life is rarely that simple: there may be break notices to exercise, surrenders to negotiate and the Act rights to grapple with. Failing to overcome these hurdles in the right way and at the right time can prevent the landlord from obtaining possession when he wants and, in a worst case scenario, halt a development scheme in its tracks.
Important notice
Where tenants have security of tenure under the Act the landlord will not be entitled to possession until he has met the requirements of the Act. This provides that where a lease comes to an end then (assuming it benefits from protection under the Act) the tenant will be entitled to remain in occupation until either party takes steps under the Act to bring the tenancy to an end. This broadly requires service of between six and 12 months’ notice and requires the landlord to indicate whether he is willing to grant a new tenancy. If the landlord wants to gain possession he must specify at least one of the grounds of opposition set out in section 30(1) of the Act.
Where the landlord relies on a ground of opposition, the tenant can put the landlord to proof and, ultimately, the court will decide whether the landlord satisfies his ground. This can be crucial from a timing perspective: a landlord who simply serves six months’ notice and waits to see if the tenant gives up possession could find himself in real difficulty where his tenant applies to court just before expiry of the notice. He will potentially be unable to get possession until the court process runs its course. With a court system under incredible strain, that can take 12 months or longer. The Act allows landlords to start the process as soon as they have served notice and this can be an important strategy where the landlord wants possession as soon as possible.
Getting in on the act
Most landlords know that “redevelopment” is a ground of opposition under section 30(1)(f) of the Act (often simply referred to as “ground (f)”) and it is tempting to assume that, as a result, a landlord with redevelopment aspirations is not going to have difficulties in recovering possession where he intends to redevelop. That is a dangerous assumption to make.
First, it is not enough that the landlord intends to redevelop. The redevelopment must come within the scope of ground (f). This requires 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”. There are a number of elements to be satisfied:
(a) The works must amount to demolition, reconstruction or substantial construction. A landlord who intends to do a refurbishment project without any significant demolition or structural works may find that he does not meet this requirement.
(b) The works must relate to the “holding”. This basically means the premises demised by the lease, less any part no longer occupied by the tenant. In particular, it is not enough that the landlord intends to do works to other parts of the building, even if it is impossible to carry out those works with the tenant in occupation. Difficulties can also arise where the tenant’s premises do not include any part of the structure of the building – a so-called “eggshell demise”. In those cases, the courts have held that the landlord will usually succeed if his works include removing whatever has been demised, for example, the plasterwork, flooring and ceilings.
(c) The landlord must be unable reasonably to do the works without obtaining possession. The courts have held that this means legal possession rather than physical possession and so the landlord will not succeed where he has sufficient rights under the lease to access the premises for his intended works.
The best of intentions
Even assuming that the landlord’s works tick all the right boxes, this will not be enough unless he actually intends to carry them out.
There are two separate elements to this. First, the landlord must actually have made a firm and settled decision to carry out the works. In the case of a company, any board resolutions and approvals to enable the company to make the decision would be required.
Secondly, the landlord must have a reasonable prospect of implementing that intention. For example, he will have to show that he has reasonable prospects of obtaining planning and other consents required for the works, of obtaining possession of the rest of the building and of dealing with any other third party rights which impede the development. He will also need finances in place to do the works. If the landlord cannot overcome each of these hurdles then his claim for possession is likely to fail.
All in the timing
The Court of Appeal has recently reconfirmed that the relevant date on which the landlord needs to establish his intention to redevelop is the date of the court hearing, not the date on which he serves his notice or issues court proceedings. This has important strategy implications. A landlord can serve his notice knowing that he has a window of opportunity afterwards in which to get his ducks in a row to establish his intention at court, which may be many months down the line. A tenant who suspects that the landlord’s development plans are at an early stage may consider serving an early notice and pushing the claim to court quickly in the hope of forcing the landlord to trial before he is able to establish the requisite intention.
One often overlooked element of the Act is that, even where the landlord does satisfy his ground of opposition, he does not get possession straight away. Section 64 gives the tenant a grace period of three months, plus any period for appeal, before he has to leave. It is important to factor this in when predicting likely dates for possession.
Compensation culture
Finally, landlords should not forget the fact that a tenant who is refused a new lease on redevelopment grounds will be entitled to statutory compensation under the Act. The amount will be either one or two times the rateable value of the holding, depending on whether the tenant’s business has operated from the premises for more than 14 years.
Compensation can be substantial and should be included in the landlord’s redevelopment budget. In some cases there may be scope for reducing the amount by seeking to have the rateable value of the premises reassessed but this would need to be done before notices are served as it is assessed as at the date of the notice.
Compensation can potentially be avoided altogether where the landlord can also satisfy a “non-compensation” ground for opposing a new tenancy, for example where alternative premises have been offered. This will not be an option in all situations but can be a helpful negotiating tool in the right case. As ever, tactics are key.
Why this matters
Delay on any development project can be extremely costly. A strategy for obtaining possession from existing tenants needs to be worked out at an early stage and the likely timescales for implementing that plan should be built into the development timetable. A timetable which envisages planning consent being secured six months after obtaining possession will not work where the landlord may have to demonstrate at court that he has, or will shortly get, planning consent in order to obtain possession.
Even where the landlord has a strong case, a tenant is still able to issue court proceedings, creating delay. A landlord who has thought about these issues early and allowed himself enough time to deal with them will be in a much stronger position.
The landlord’s goal should be to enter into binding agreements with the tenants, providing certainty as to when possession will be obtained, and avoiding the risk of a last-minute court application.
This will require proactive engagement with tenants at an early stage. Tactics for reaching this goal as quickly as possible could include applying pressure by issuing court proceedings and providing the tenants with a pack of evidence supporting the landlord’s intention to redevelop at an early stage. It may also be possible to apply pressure using Calderbank or Part 36 offers to put the tenant at risk on costs if they proceed to court and lose.
Finally, landlords and their advisors should be aware of disclosure obligations throughout the process. If court proceedings are started, the landlord will be obliged at a relatively early point to provide the tenant with copies of all documents relevant to their intention to redevelop, including e-mails. This includes both helpful and any unhelpful documents. It is important that the whole of the landlord’s project team is mindful of this obligation when e-mailing or otherwise creating documents. Legal advice is not disclosable and so should be sought if in doubt.
Key provisions
Landlord and Tenant Act 1954
- section 30(1)
- section 64
Paul Tonkin is a senior associate in the real estate disputes team at Hogan Lovells International LLP
