Supreme Court introduces new test for assessing a landlord’s intention to redevelop

Background

The LTA 1954 (the Act) is perhaps the most important legislation governing commercial leases and confers protection on business tenants known as ‘security of tenure’. 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 leased to the tenant.

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 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 essential feature of the landlord’s scheme was that it was put together solely to satisfy ground (f). 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. If that intention was sufficiently made out, that was all that was required for the purposes of satisfying ground (f).

The tenant appealed the decision. The tenant’s primary argument was that the landlord’s intention to carry out the works was conditional on the tenant not leaving voluntarily. It argued that this type of conditional intention did not engage ground (f) and that it could not have been the intention of the Act to allow landlords to circumvent the statutory protection conferred on business tenants by undertaking works for the sole purpose of getting the court to make an order under Act.

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”, referred to by Lord Sumption, 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).

The landlord’s motive and purpose was held not to be directly relevant, but if the primary purpose of the work is to get rid of the tenant, that may well undermine intention, especially if there is no other point to the works.

What are the implications of the case for landlords and tenants?

This is an important decision for commercial landlords and tenants alike whose leases are protected by the Act.

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 and, in light of this decision, it is very unlikely that any landlord will adopt the same approach again.

However, the Court recognised that there will be more nuanced cases where the landlord intends to carry out a set of works whether or not the tenant vacates voluntarily together with “spurious additional works” for the purposes of satisfying ground (f). 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 then 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. In addition, this new approach will require the courts to undertake a more forensic analysis of the landlord’s works which will, in turn, lead to wider disclosure during the litigation process and greater reliance on expert evidence. In short, the costs of defending/challenging a ground (f) claim are likely to increase significantly.

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