Secure future: Good news for tenants in relation to their retail premises

But what happens when the lease expires in 5 or 10 years’ time? Having invested such significant capital sums into securing the site and fitting it out, many tenant retailers assume that their landlord is obliged to grant them a new lease, but is that always the case? And what can the tenant do if the landlord refuses?

A recent case in the Supreme Court has put this question into sharper focus.

Background

The starting point is to check what type of lease has been granted. Broadly there are two types of commercial lease:

(i) a ‘protected’ lease (i.e. a lease that is within the Landlord and Tenant Act 1954 (the Act)) and

(ii) an ‘excluded’ lease (i.e. a lease which has been excluded from the provisions of the Act). For the lease to be excluded, there must be a specific clause in the lease to the that effect and notice must first be served on the tenant before the lease has been entered into warning the tenant it will be entering into a lease outside of the Act.

If the lease has been properly ‘excluded’, on expiry, there is no automatic right for the tenant to renew and the landlord can refuse to grant a new lease without giving any reasons.

If the lease is not excluded then it is within the Act. The Act confers protection known as “security of tenure”. There are two basic elements to this: (i) the “statutory continuation” of the tenancy and (ii) the tenant’s right to apply to Court for a new lease.

Statutory Continuation: Provided the tenant remains in occupation, a protected business tenancy does not automatically terminate on the contractual expiry date of the lease but continues on more or less the same terms until renewed or terminated in accordance with the Act.

Right to Renew: If the tenant or landlord cannot agree a new lease, either can apply to court to determine the terms.

That security can, however, be overridden by landlords in certain circumstances, which are set out in section 30(1) of the Act. The most common ground of opposition is known as ‘ground (f)’ and arises where the landlord intends to redevelop the premises.

Where a landlord relies on ground (f) it was well established that it must be able to show that it has a firm, settled intention to either demolish or carry out substantial works to the premises and that it is practically able to do so. What was less certain was the relevance of the landlord’s motives, the reasonableness of its intentions and whether the work itself has to be commercially viable. This was the issue that fell to be determined by the court in the recent case of S Franses Ltd v The Cavendish Hotel (London) Ltd.

The facts

In this case, the tenant, S Franses Ltd, occupied a commercial unit on the ground floor and basement in St James’s, London. The remainder of the building (forming the Cavendish Hotel) was managed and occupied by the landlord.

The tenant served a notice on the landlord under the Act requesting a new lease of the premises. The landlord served a counter notice relying on ground (f). The tenant issued proceedings to challenge the landlord’s ground of opposition.

The landlord made no attempt to hide the fact that the scheme had been designed for the purposes of ground (f) so that it could claim back possession from the tenant, but otherwise conferred no commercial or practical benefit. Indeed, somewhat brazenly, the landlord conceded in cross examination that if the tenant were to vacate voluntarily, it would not undertake any of the works at all.

The High Court found in favour of the landlord and held that the motive for the work did not, of itself, undermine a landlord’s position where it had a genuine and settled intention to proceed with the redevelopment. If that intention was sufficiently made out, that was all that was required for the purposes of satisfying ground (f).

Supreme Court decision

The court overturned the High Court decision and ruled in favour of the tenant. Giving a unanimous decision, the court held that a landlord’s decision to carry out works pursuant to ground (f) must exist independently of the tenant’s right to a new statutory tenancy. The “acid test” is whether the landlord would intend to do the same works if the tenant left voluntarily. If not, then the landlord’s intention will not be sufficient to engage ground (f).

What are the implications of the case for retail tenants?

In short, the decision should come as a relief to all retail tenants and will help ensure that they receive the protection intended by the Act.

Whilst the facts in this case were extraordinary, insofar as the landlord openly admitted that it would not have done any of the works if the tenant vacated voluntarily, the Court recognised that there will be more nuanced cases where the landlord intends to carry a set of work whether or not the tenant vacates voluntarily together with artificial additions purely for the purposes of beefing up their ground (f) claim. Indeed it has been a long held practice for landlords looking to redevelop to design their scheme of work with ground (f) in mind to ensure they recover possession from the tenant. In these circumstances the court said the correct approach is for each element of the scheme to be analysed separately to ascertain which elements the landlord would undertake unconditionally and those which were conditional on the tenant vacating. Any conditional elements are to be disregarded for the purpose of assessing the landlord’s intention under ground (f). For landlords facing well-advised tenants this particular tactic now appears to be at an end and landlords can expect their schemes to face rigorous scrutiny to ensure they are commercially viable and not a sham.