Most business tenants have a statutory right to a new lease at the end of the contractual term if the lease has not been contracted out of the security of tenure provisions and if it satisfies the qualifying criteria set out in the 1954 Act. In brief, the qualifying criteria can be broken down into the following categories:
- Is there a tenancy?
- Does the tenancy relate to premises?
- Are the premises occupied for the purpose of a business?
- Is the business carried on by the tenant?
- Does the tenancy fall within any of the specific exclusions?
A tenancy protected under the 1954 Act does not terminate automatically at the end of the term, it continues on the same terms as the contractual tenancy unless it is terminated in one of the prescribed ways under the 1954 Act.
Grounds of opposition to a lease renewal
Landlords may oppose renewal of the lease for certain limited and specific grounds. Some grounds are discretionary such as the premises are in disrepair, or there are arrears of rent, or other breaches of covenants. This means that the court may grant a new lease even if the grounds of opposition are made out. Other grounds such as suitable alternative accommodation, landlord’s intention to redevelop and landlord’s intention to occupy are mandatory. The landlord may specify one or more grounds of opposition.
This article looks into a specific mandatory ground of opposition – the landlord’s intention to redevelop.
The landlord’s intention to redevelop
Firstly, to what categories of works does the landlord’s intention to redevelop relate? This may be demolition of the whole or a substantial part of the premises; reconstruction of the whole or a substantial part of the premises or substantial works of construction to the whole or part of the premises that the tenant occupies for the purpose of its business.
Secondly, the landlord must show a firm and settled intention to carry out works as well as a reasonable prospect of achieving that intention. The landlord may also try to ascertain the possible issues it may face and prove that there are not too many difficulties to overcome during the process.
If the landlord successfully opposes renewal of the lease on the redevelopment ground, the tenant can claim statutory compensation which is calculated as a multiplier of the rateable value of the property. If the tenant and any predecessor carried out the same business and have been in occupation for business purposes for 14 years or more, the compensation is calculated as a multiplier of twice the rateable value. Compensation is paid when the tenant vacates the property.
What if redevelopment is currently not possible?
What if the landlord is not in a position to carry out redevelopment at the expiry of the lease term but it has plans to redevelop or to sell the property with a view to redevelopment in the short or medium term?
One of the options may be to enter into a new lease and negotiate a shorter length of the term of a new lease. If the tenant does not wish to agree to a shorter lease term, the landlord may insist on inclusion of a redevelopment break clause into a new lease, although a party wishing to depart from the current lease terms will need to justify the change.
Redevelopment Break clause
If the parties are unable to agree on the insertion of a redevelopment clause in a lease, the Court may be asked to exercise its discretion to direct the inclusion of a break clause into a new lease. The Court has to take into account all relevant circumstances such as both parties’ interests, the terms of the existing tenancy, the needs of the tenant’s business, and the parties’ future intentions for the premises.
“Real Possibility” of redevelopment
The court will consider whether there is a “real possibility” as opposed to a probability of development in exercising its discretion to include a break clause. If a court imposes a re-development break clause into the lease, it will have to make a qualitative assessment in that it has to balance the tenant’s interests against the landlord’s interest in the development. This involves a fact sensitive balancing of the parties’ various countervailing interests, the imminence of any development, and the business impact on the tenant. The court has said that it is important not to assume that a redevelopment break clause will be inserted in every case simply because the real possibility of future development is proven. It said this would be to ignore the fundamental fact sensitive balancing exercise in play in each case, including the need to give a tenant a reasonable degree of security of tenure.
For the court to be able to consider what would be appropriate in the current circumstances, it will be necessary for the landlord to set out in evidence details of the proposed redevelopment they wish to undertake at the property, how much it will cost to do the works, the length of time to do the works and the time it will to take to achieve a financial return on the redevelopment.
Where the landlord wishes to include a redevelopment break, it has to provide the evidence necessary to establish that future development is a “real possibility”. Although the test is lower than for establishing the redevelopment ground, the evidence adduced should be enough for the court to take a view as to exactly what possible developments are envisaged, the likely timeframes and how realistic a prospect such development actually is within the term of the lease. Ideally the evidence would cover the following matters: Who is likely to be the developer? What are the prospects of obtaining planning consent and financing the project? What other obstacles are in the way (such as obtaining vacant possession of other sites) and how might they be overcome?
The court will then have to weigh up both parties’ evidence and use its discretion on whether to impose a break clause and if so, what it considers is reasonable in all of the circumstances. It is open to the court to consider how long the notice should be for exercising the break clause and it could make the notice period more than 1 year if it considered it necessary.
If the landlord wishes to oppose a new lease on the redevelopment ground, it has to show that it has a firm intention to proceed with the works at the end of the lease term and it has a reasonable prospect of achieving that intention. If the landlord is unable to fully satisfy the redevelopment ground, but the redevelopment is likely to happen sometime in the near future, the landlord may wish to enter into a new lease with the tenant agreeing a shorter term of lease or agreeing the inclusion of the break clause into a lease. If the tenant is unwilling to agree the inclusion, the landlord may apply to the court which will weigh up both parties’ evidence and use its discretion on whether or not to impose a break clause.
The team at Bishop & Sewell LLP has an excellent knowledge and expertise acting for both landlords and tenants on all matters related to commercial lease renewal, drafting commercial contracts and leases, preparation of notices related to lease termination or renewal.
The above is accurate as at 01 December 2020. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.