Landlord and tenant — Landlord and Tenant Act 1954, Part II — Appeals by landlords from county court orders — No dispute as to grant of new tenancies, but issues as to length of terms and as to whether leases should include break clauses to enable landlords to determine the tenancies for redevelopment — County court judge had ordered new leases for 12 and 10 years respectively without break clauses for redevelopment — Held that in the circumstances of the two cases it was wrong to grant new tenancies for such substantial terms as 12 and 10 years without development break clauses — A fair solution was the grant of 7-year leases with (1) a rent review at the end of the fifth year, and (2) a redevelopment break clause not to take effect until the end of the fifth year of the term — Appeals allowed and orders accordingly
These were two
appeals by the landlords, Central London Commercial Estates Ltd, from decisions
of Judge Phelan at the Bloomsbury and Marylebone County Court on applications
by the tenants, J H Edwards & Sons Ltd and Eastern Bazaar Ltd,
respectively, for new tenancies of business premises at 131 and 131A Tottenham
Court Road, London W1.
Derek Wood QC
and Kirk Reynolds (instructed by Michael Conn & Co) appeared on behalf of
the appellant landlords; Robert G Lamb (instructed by Michael Freeman & Co)
represented the respondents J H Edwards & Sons Ltd and (instructed by M M
Patel & Co) the respondents Eastern Bazaar Ltd.
Giving the
first judgment at the invitation of Cumming-Bruce LJ, FOX LJ said: There are
before us two appeals by the landlord from decisions of Judge Phelan in the
Bloomsbury and Marylebone County Court on applications by the tenants under the
Landlord and Tenant Act 1954 for new leases of business premises.
The landlords
are Central London Commercial Estates Ltd. The tenants are J H Edwards &
Sons Ltd (‘Edwards’), a firm of watchmakers, and Eastern Bazaar Ltd
(‘Eastern’).
It is not in
dispute that new leases should be granted. The issues, at this stage, are two,
namely (i) the length of the leases and (ii) whether the leases should contain
break clauses enabling the landlord for the time being to determine the leases
of the premises should they be required for redevelopment or for the landlord’s
occupation. The judge ordered that Edwards be granted a new lease for 12 years
and Eastern a new lease for 10 years — in neither case will the lease contain a
redevelopment break clause.
The premises
consist of two shops, nos 131 and 131A Tottenham Court Road. No 131 is occupied
by Edwards and no 131A by Eastern. The business of Edwards has been carried on
from no 131 since 1958 during which time three leases have been granted. The
business of Eastern has been carried on from no 131A since 1980.
The two shops
form part of a parade of small shops which stand on both sides of the main
entrance to a large building which is now the Grafton Hotel (‘the hotel’). Nos
131 and 131A adjoin each other to the north of the hotel entrance. The
landlords also own nos 127 and 129 Tottenham Court Road (which are to the south
of the hotel entrance) and nos 132 and 132A, which are to the north of 131A.
The two most recent leases of no 131 were granted to Edwards in 1972 and 1979.
The 1972 lease
was granted on November 21 1972 for the term of five years from December 26
1972. The lease (by clause 5) provided that if the lessor required possession
of the premises for the purpose of demolition or reconstruction of a substantial
part, the lessor might determine the lease on six months’ notice after December
24 1974. The subsisting lease of no 131 is dated April 11 1979 and was for the
term of five years from December 25 1977. This lease contained a break clause
(clause 4(9)) similar to that in the 1972 lease. The insertion of this clause
was in no sense a formality in the 1977 lease; it was the subject of
correspondence and disagreement prior to the execution of the lease.
The present
lease of no 131A is dated October 10 1978 and is for a term of five years from
December 25 1977. The lease contains a redevelopment ‘break’ clause. That lease
was assigned to Eastern in June 1982.
On June 14
1982 the landlords entered into an agreement with Edward Hotels Ltd to grant to
that company a 60-year lease from June 24 1982 of the hotel and nos 127 to 132A
Tottenham Court Road. Edwardian Hotels Ltd (‘the hotel company’), who are not
associated with Edwards, run the hotel and a number of other hotels as well.
As regards the
formalities under the Landlord and Tenant Act 1954 the position is as follows:
The landlords
served notices to terminate the tenancies of both no 131 and no 131A on
February 5 1982. Each notice stated that the landlords would oppose the grant
of a new tenancy on the ground of the tenants’ failure to comply with
obligations as to repair and maintenance under the current lease. The ground of
opposition was not persisted in as regards either of the applications. The
landlords did not rely upon the provisions of section 30(i)(f) of the Landlord
and Tenant Act 1954 (ie intention to demolish or reconstruct the premises or a
substantial part or to carry out a substantial work of construction on any part
of the holding). Nor did the landlords rely upon section 30(i)(g) of the Act
(intention by the landlord to occupy the premises for the purposes of a
business carried on by him).
On May 14 1982
Eastern issued an originating application under the Landlord and Tenant Act
1954 seeking a new lease of no 131A for 14 years from the termination of the
current tenancy. And on May 19 1982 Edwards issued an originating application
under the Act asking for a new lease of no 131 for five years from the
termination of the current tenancy. The term ultimately sought was, however, 14
years.
The hotel was
used as an hotel prior to the 1939 war. It was then requisitioned and seems to
have been used as a nurses’ home for a long period. A 25-year lease was granted
which expired about 1976; the then lessee was the Department of Health and
Social Security, which held over and finally gave up possession early in 1980.
The landlords (who had acquired the reversion in 1961) received about
£1,000,000 in respect of dilapidations.
It is clear,
as a matter of law, that the 1954 Act is not to be used to inhibit development
(see, for example, Reohorn v Barry Corporation [1956] 1 WLR 845; London
& Provincial Millinery Stores Ltd v Barclays Bank Ltd [1962] 1
WLR 510). In the present case it is a matter of importance to determine whether
the two shops may be required for redevelopment purposes. It is the landlords’
case that they may be so required and that, therefore, either a fairly short
lease or a lease with a redevelopment ‘break’ clause is appropriate in each
application.
The landlords’
original intention was a comprehensive development of the whole site. That, the
judge found, was the reason why they inserted redevelopment ‘break’ clauses in
the leases of some of the shops. The local authority were, initially,
favourable to such development, but in 1978 they withdrew their support and no
comprehensive scheme is in view.
It is said,
however, that nos 131 and 131A may be required for development of the hotel.
Under the
provisions of an agreement of June 14 1982 between the landlords and the hotel
company (and of the draft lease annexed thereto) the hotel company are not to
use the shop premises for anything except retail trades and the area of use for
that purpose was not to be reduced.
On July 20
1982 the board of the hotel company resolved that it would be necessary to
obtain vacant possession of nos 127 to 131A Tottenham Court Road ‘in order to
carry out substantial alterations to the ground floor layout of the hotel to
provide the necessary facilities essential to the proper functioning of a hotel
of their standard and size’. And it was resolved that the architect be
instructed to draw up plans for incorporating the area of the shops within the
ground-floor layout of the hotel.
The only
representative of the hotel company who gave evidence about this was Mr Shah,
who is a director of the company and a minor shareholder. It appears that he
was unable to give much information about the matter. According to the judge’s
note, he said, ‘We wish to
there is today. We have made no detailed plans as at present we have only the
area on the left [ie nos 127 to 129]. Our plans, therefore, are very
flexible.’ Later in his evidence, after
agreeing that the foyer was very smart, he said: ‘We could develop in two
sections later. If we developed the ‘left’ front we could develop the ‘right’
next.’
Mr Maguire,
the landlord’s surveyor, said that the landlord originally intended the shops
to remain and, if possible, to be upgraded.
The judge, in
the judgment, said that Mr Maguire in his evidence on May 25 said:
In the last
few days Mr O’Dell [ie the hotel company’s surveyor] and I have discussed using
some of the shops as integral parts of the hotel. We are very flexible about
it. The hotel could become of higher quality and grade. The loss of the income
would be compensated on rent review . . . Mr O’Dell and I are agreed in
principle now as to three of the units — these are to the left. We do need a
break clause; it is important to give effect to our proposals. We want to
implement the best possible scheme.
Mr O’Dell said
in his evidence that Mr Maguire and he did discuss the question of ‘removing’
the shops before July 1982. The judge’s notes read:
There was
nothing, however, as high as an agreement. I’d call it an understanding between
us. It was generally felt that the reception and ancillary areas should be
bigger for a hotel of this size.
In his evidence
at the adjourned hearing on June 30 1983, however, Mr O’Dell resiled from that
and said that the understanding must have been on his part. The judge thought
that was correct. Mr O’Dell also said that there was always the possibility
that the hotel would need the ground floor of the shops but that there had been
no decision yet. He thought that ‘the present urgent requirement is an
extension of the reception area. Ideally the hotel would take 127 to 131A
inclusive’.
I observe that
on January 17 1983 Mr Maguire, in a letter to Mr O’Dell, said:
You have
explained that in order to obtain the best possible grading of the hotel it
would be necessary to enlarge and enhance the facilities at ground floor level
with particular regard to the reception area. For our part we are no less
concerned to see the highest possible grading of the hotel and we recognise
that it may be necessary to compromise between hotel and shopping space in
order to achieve this.
The landlords,
of course, are concerned to maintain rentals.
There was
evidence from Mrs Goff, an official of the local authority. Extension of the
hotel entrance, she felt, would not be acceptable to the planning authority ‘if
the shops just went’. But if they were mere boutiques inside the hotel, it
would be a question of how accessible they were to the public.
On the
evidence I think that the possibility exists that the landlords for the time
being will wish to acquire nos 131 and 131A in order to improve the hotel. The
judge, as I understand his judgment, accepted that. At p 30 of his judgment, he
said:
. . . there
is not, of course, any need for the landlords to show anything like a settled
intention to redevelop as they would under section 30(1)(f) of the Act. They
say, in essence, here that they wish to give the hotel the means to implement
the best possible scheme for the future. It suffices, in my view, if they show,
and indeed I find they have shown, a possibility of a bona fide decision
to operate a break clause if one be granted.
In the judge’s
opinion the onus lay on the tenants to show they would suffer more hardship if
a break clause were inserted in the new lease than the landlord would suffer if
it was not.
As to the
hardship to the tenants, the judge found:
(a) that the statutory compensation payable to
the tenants under section 17 of the 1954 Act would not recompense them for
disturbance;
(b) that the tenants ought to have an incentive
to keep their shops in first-class condition and would not have such an
incentive unless they had a fair degree of security.
As to the
hardship to the landlords (and their successors) the views were as follows:
(i) he was not satisfied that there would be any
real impediment to enhancing the character of the hotel if nos 131 and 131A
remain;
(ii) he thought that the hotel could ‘live fairly
happily with the scheme which will now give them the space occupied by the
shops to the left’.
(iii) he thought that the landlords’ financial
prospects would not be impeded by the inability to incorporate nos 131 and
131A.
The judge concluded
that the tenants had discharged the onus upon them and that it was fair and
reasonable that they should be granted leases without a break clause.
In considering
the matter the court is required ‘to have regard to the terms of the current
tenancy’ (see section 35 of the Act of 1954). The burden of persuading the
court to alter the existing terms rests on the party proposing the change (see O’May
v City of London Real Property Co Ltd [1982] 2 WLR 407). The current
leases in the present case do contain development ‘break’ clauses. But in view
of the judge’s finding the background to the inclusion of the clause was the
landlords’ intention to procure a comprehensive development of the whole site
and that that intention has significantly changed, I do not regard the clauses
as being of decisive weight in the present case though they are not to be
disregarded.
There are a
number of specific matters relied on by the judge, to which I should refer.
(i) The inadequacy of the statutory
compensation. I do not think that consideration is of much assistance. The
statutory compensation is a matter for Parliament and, as I understand it, the
present figure was recently fixed (by the 1981 Regulations).
(ii) The judge thought that the tenants should
have an incentive, presumably in the form of security, to keep their properties
in first-class condition. That, however, cannot have been a consideration which
had much influence on the tenants when they took the existing leases so far as
the inclusion of break clauses is concerned, since the leases contain such
clauses.
(iii) In the judge’s view the continued existence of
nos 131 and 131A would not be a real impediment to enhancing the character of
the hotel. The judge formed that view after inspecting the hotel, but I think
it is a matter for the hotel company to decide what, in the interests of its
business, is the best way of enhancing the character of the hotel.
Again, I do
not think that the fact that, as the judge thought, ‘the hotel is at present
operating quite well’ is of assistance. It is a matter for the company to
decide whether it could be operated better by incorporating the shops. Much the
same applies to the opinion that ‘the hotel can live fairly happily with the
scheme which will now give them the space occupied by the shops to the left’.
Now, as I have
indicated, it seems to me that the evidence establishes that the superior
landlord for the time being may wish to develop nos 131 and 131A as part of the
hotel. In that connection it is important to bear in mind that, in view of the
agreement of June 1982, the company is likely soon to be the superior landlord
of the tenants of the shops for the purposes of the 1954 Act. It is not
satisfactory to look at the matter simply from the point of view of the
appellant landlord.
If it is
likely that the superior landlord for the time being may wish to develop the
property, then (since it is not the policy of the 1954 Act to inhibit
development) he should not be saddled with a lease which may prevent such
development. In that connection a present intention to redevelop immediately is
not necessary: (see Adams v Green (1978) 247 EG 49, [1978] 2 EGLR
46; Amika Motors v Colebrook Holdings Ltd (1981) 259 EG 243). Accordingly,
it seems to me that it must be wrong in principle, in the present case, to
order the grant of new leases for such substantial periods as 12 and 10 years
respectively without development ‘break’ clauses. That has the effect of
preventing development without the consent of the tenants during the period of
the leases. I conclude, therefore, that the judge’s decision was wrong and that
the matter is at large before us.
In considering
what would be proper leases in the circumstances of this case I think that the
predominant considerations are two. First, that so far as reasonable the lease
should not prevent the superior landlord from using the premises for the
purposes of development. Secondly, that a reasonable degree of security of
tenure should be provided for the tenants. Those considerations are to some
degree in conflict. The function of the court is to strike a reasonable balance
between them in all the circumstances of the case.
I bear in mind
that Edwards has a long-established business at no 131 and disturbance might be
a considerable hardship to the firm. Eastern, on the other hand, has come to
its premises a great deal more recently.
I also bear in
mind that it is not the purpose of the Act to give a tenant saleable assets but
rather to protect him in the conduct of his
1294 per Denning LJ).
Having regard
to the fact that the hotel has at present no firm proposals for incorporating
nos 131 and 131A, I think that a fair solution would be that the tenants should
each be granted a new lease for seven years with (i) a rent review to take
effect from the end of the fifth year; and (ii) a redevelopment ‘break’ clause
in the form of clause 4(9) of the present lease of no 131, but so that the
notice in writing therein referred to shall not expire earlier than the
expiration of five years from the commencement of the term.
Leases in
these terms would achieve five years’ security of tenure for the tenants (with
the possibility of a further two years if the landlords did not require
possession for the purposes mentioned in clause 4(9)). At the same time, the
leases would not prevent redevelopment during an unduly long period. I should
add that, with leases of this duration, I do not think there is any cause for
differentiating between nos 131 and 131A as regards the length of the term. I
would allow the appeals accordingly.
CUMMING-BRUCE
LJ agreed and did not add anything.
The appeals
were allowed and orders made for new tenancies each for a term of seven years,
with a rent review at the end of the fifth year and a redevelopment break
clause not to take effect until the end of the fifth year. As to costs, the
respondent tenants were ordered to pay two-thirds of the appellant landlords’
costs in the Court of Appeal; no order for costs below.
