The Supreme Court is hearing a landmark appeal that could have a major impact on the ability of landlords to refuse commercial tenants’ applications for lease renewals.
In one of the most eagerly anticipated property law cases of the year, the country’s highest court is being asked to decide what intention a landlord is required to show in order to refuse a new lease on grounds of redevelopment plans, under ground (f) of section 30(1) of the Landlord and Tenant Act 1954.
Unusually, the landlord in this case, the Cavendish Hotel at Jermyn Street, London W1, has made clear all along that its sole motive for carrying out the planned redevelopment work necessary to satisfy ground (f) is to get rid of its tenant of part of the hotel premises, S Franses Ltd, which operates an art gallery and showroom there.
The Cavendish Hotel has offered an undertaking that the works will be carried out. In the High Court decision under challenge, a judge found that this was enough for the landlord to rely on ground (f).
Opening the appeal today, Joanne Wicks QC, representing the appellant, S Franses, said that the landlord was “prepared to do whatever was necessary to get the tenant out”. She said that it had produced a “contrived” scheme of redevelopment works that would cost in the region of £776,000 and render the space “unusable”.
She argues that, in the light of the “artificiality” of the proposed works, the landlord has failed to demonstrate the necessary intention to rely on ground (f).
The court is not likely to give judgment in the matter until early 2019.
Intention and motive
Helen Wheddon, partner at Stevens & Bolton, described the case as “highly anticipated, if somewhat unusual”, and said that the Supreme Court found itself having to decide what “intention” meant for the purposes of ground (f) claims and whether “motive” came into play.
She said: “Can a landlord relying on ground (f) to oppose a lease renewal demonstrate the requisite firm, settled and unconditional intention to do the works when there is no commercial purpose for doing the works, beyond just ending the protected tenancy? This case has raised eyebrows because it involves the landlord openly admitting the proposed works are simply a bid to defeat the tenant’s claim for a new lease, and are being proposed irrespective of cost or commercial benefit and it gave an undertaking to the court that it would do the works.
“One critical point is whether the court will make successful ground (f) claims dependent on the court deciding what is effectively an entirely subjective assessment, namely what constitutes a sound commercial purpose for carrying out works. The subjective nature of this decision could cause considerable uncertainty for landlords opposing a tenant’s claim for a renewal tenancy.”
She added that tenants who wish to remain in their premises will be hoping for a ruling which might make it more difficult for landlords to rely on ground (f ) if their true intentions are just to “get the tenant out” at whatever cost, and the works relied on serve no practical or commercial purpose.
She said: “Whichever way the judgment goes, any landlord who relies on ground (f) would be wise to ensure they can establish a very real intention to actually carry out works of a substantial nature, whatever the true purpose behind carrying out these works might be. In particular, they should be aware that the more commercially unviable a re-development scheme appears, the closer a court might examine the genuineness of its professed intention to do those works.”
Commercial behaviour
According to Matthew Bonye, partner and head of real estate dispute resolution, London at Herbert Smith Freehills LLP, the eventual decision of the Supreme Court could have a profound effect on the commercial behaviour of landlords and tenants.
Bonye explained: “The legal test as things stand pre-appeal, is relatively straightforward. Either the landlord has a settled intention to carry out the works or it doesn’t. Where there are nuances as to what ‘intends’ means, these are usually tied to feasibility – whether planning permission is available, whether implementation is practicable given the existence of other tenants or other constraints, whether funding is available and so forth.
“Right now, nobody in the court process is delving into the mind of the landlord, to find out what its underlying motive is for carrying out the works. All this may change, depending on the Supreme Court’s view.
“But what interests me most is the way a change in the law would affect landlord and tenant commercial behaviour. A tenant will then know it can seek court-ordered disclosure of internal landlord documents, such as emails, that show what has motivated the landlord’s business decision to carry out the development. A tenant may even want to destruction-test the landlord’s business case for the scheme to see if the works to its own unit are adding any value.
“Even when the landlord has demonstrable reasons, aside from satisfying the redevelopment ground, to do the works, it may prefer not to divulge its private documents that refer to these points. This may lead to more or earlier negotiated surrenders, where a landlord pays a premium over and above statutory compensation, or grants a rent holiday in return for certainty of gaining vacant possession.
“Landlords, in contrast, may insist more often on granting excluded tenancies, perhaps with excluded options to renew, rather than deal with the 1954 Act at all. This may dampen achievable rents.”
He added that ground (f) might not be the only one affected: “There is also the question as to where the relevance of a landlord’s motive may end. Ground (g) allows the landlord to terminate a business tenancy where the landlord intends to occupy the premises itself, either for business purposes or as a residence. If the law changes, will this ground be subject to the same strictures? What if a landlord has a genuine desire to move into the tenant’s premises but only because this will terminate the tenant’s protected lease? Arguably, if the law on the redevelopment ground changes, so will the law on ground g.”
A ‘mountain to climb’?
Roger Cohen, partner at Bryan Cave Leighton Paisner, offered “congratulations to the tenant’s legal team, whatever the result”, adding: “They have secured for their client another 18 months trading whilst the case goes to the Supreme Court; 18 months extra where the landlord wants the tenant out.”
However, he feels the tenant has a “mountain to climb” on both grounds of appeal. Cohen said: “It says that the landlord’s (lack of) commercial purpose is relevant. But property law is not tax law. It does not do ‘commercial purpose’. The tax cases on artificial transactions have not been applied in other property contexts. Why start now ?
“A landlord who gives an undertaking, which is a solemn promise to the court, to demolish has put its money where its mouth is. If the landlord does not proceed, someone could go to jail. The landlord has done enough to get its property back.”
S Franses Ltd v Cavendish Hotel (London) Ltd: The story so far
The case involves a dispute between landlord, the Cavendish Hotel, and its tenant of premises at 80 Jermyn Street, S Franses, which carries on business as a textile dealership and consultancy, specialising in antique tapestries and textile art.
The tenant applied under the 1954 Act for a new tenancy, but the landlord opposed this application under section 30(1)(f).
A landlord is entitled to refuse a new lease under ground (f) if it “intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises or to carry out substantial work or construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding”.
Both the Central London County Court and the High Court sided with the landlord on the key preliminary issue of whether the landlord had made out its ground of opposition under ground (f).
Mr Justice Jay at the High Court found that the requisite intention under ground (f) was demonstrated, even though the evidence was that the landlord’s motive for redevelopment was to get rid of the tenant.
Unusually, permission was granted for a “leapfrog” appeal straight to the Supreme Court to decide the important matter.
Other issues in the complex proceedings may subsequently fall to be decided by the county court, High Court and Court of Appeal.
The issues
The Supreme Court is being asked to decide two key questions:
■ Whether a landlord which intends to carry out works if, and only if, those works are necessary to satisfy s 30(1)(f), and which offers an undertaking to carry out those works (as the landlord in this case has done ) has the requisite intention for the purposes of ground (f).
■ Whether a landlord whose sole or predominant commercial objective is to undertake works in order to fulfil ground (f) and thereby avoid the grant of a new lease to the tenant, and which offers an undertaking to carry out those works, has the requisite intention for the purposes of ground (f).
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