The 1954 Act – McMisrepresentation

Commercial landlords should be aware of this high court decision which highlights the risks of over egg(mcmuffin)ing your case when seeking to oppose a lease renewal.

 

The relevant law

A business tenant with protection under the Landlord and Tenant Act 1954 is entitled to a renewal lease unless its landlord can prove one of seven grounds of opposition. If the landlord successfully opposes the renewal, it can obtain an order from the court terminating the tenant's lease.

However, if it is found that a termination order was obtained by misrepresentation or the concealment of material facts, the court may order the landlord to pay to the tenant "such sum as appears sufficient as compensation for damage or loss sustained by the tenant as the result of the order".

 

The background to the case

McDonald's had been the tenant of premises on the South Bank in London for many years. Being on the River Thames opposite the Houses of Parliament, it was one of their most prominent sites. 

When its lease ended in 2017, McDonald's sought to renew but its landlord opposed this on the 1954 Act ground that it intended to occupy the premises for the purposes of its own business (known as ground (g)).

At the hearing of the opposed lease renewal claim, the landlord gave evidence that, when McDonald's tenancy ended, the landlord intended to run a Japanese restaurant to be called Zen Bento from the premises and would begin trading with that concept and under that name as soon as reasonably practicable after possession had been obtained. To help prove its case, the landlord gave an undertaking to the court to this effect. The court was persuaded by this and granted an order terminating McDonald's tenancy without renewal.

Following the court's termination order, McDonald's vacated the premises in March 2019 but it wasn't until March 2020 that the landlord opened its new restaurant. However, the restaurant it opened wasn't Zen Bento.

 

McDonald's misrepresentation claim

As well as a claim in deceit (which failed), McDonald's brought a claim for compensation under section 37A of the 1954 Act on the basis that the termination order was obtained by misrepresentation or the concealment of material facts. McDonald's case was that the landlord did not, at the time of the 1954 Act hearing, intend to open a restaurant and trade from the premises in the manner referred to in its undertaking to the court.

The court held that the delays in opening the new restaurant and the move away from Zen Bento were not, on their own, sufficient to demonstrate misrepresentation or the concealment of material facts. Neither set of circumstances proved that the landlord had never intended to occupy the premises for the purposes of Zen Bento. It was accepted that the landlord faced delays in fitting out and by the time the premises did open for business the pandemic had begun, and the new business had to cope with everything which that involved.

Where the landlord came unstuck was in its conduct immediately after the court had made the termination order. In a series of rather bizarre emails sent by the landlord's managing director, it became clear that, contrary to the undertaking it had given to the court, the landlord had not settled on a particular type of restaurant to run from the premises. In one such email (of many), the landlord's managing director stated: "Let’s make the Finest Spanish Fish Cuisine Restaurant at the current junk fast food McDonalds space by Westminster Bridge upon the Mother River Thames".

 

The court's decision

The court decided that the landlord's conduct after it had succeeded in the original termination claim showed that, at the hearing of that original claim, whilst it intended to run a restaurant from the premises, the landlord did not intend to run Zen Bento there. This meant that the landlord had misrepresented to the court its intentions relating to the premises and, moreover, this had induced the court to terminate McDonald's tenancy without renewal.

This meant that McDonald's claim under section 37A of the 1954 Act succeeded and the landlord was ordered to pay compensation. The amount of such compensation is to be determined in a separate trial. However, it will be based largely on the loss of profits which McDonald's will have suffered through not being able to trade from these premises for 15 years, so will likely be substantial.

 

Implications of this case

Compensation under section 37A for misrepresentation was introduced as part of the 2004 reforms of the 1954 Act. This is one of the few reported decisions on this section.

As well as being a helpful illustration of how a court will apply section 37A in practice, there are a number of other useful learning points which landlords can glean from this judgment.

When opposing renewal under the 1954 Act:

• Ground (g) does not necessarily require a landlord to intend to run a specific business from its tenant's premises. The irony of this is that if the landlord had been honest about its intentions at the original trial, i.e. that it only intended to run some form of restaurant from the premises, it might still have succeeded. Having said that, the less specific the landlord's plans, the less likely a court will regard them as being sufficiently genuine.
• Don't treat the grounds of opposition as just a means to an end as the landlord did here. If a landlord recovers possession and then doesn't do what they said they would, that casts a lot of doubt on the genuineness of their original stated intention. The courts have recently clamped down on landlords who seek to design their works purely to come within the redevelopment ground (f) and there was a similar principle at play here.

More generally:

• This should go without saying but don't give an undertaking to the court unless you really mean to comply with it. Breaching an undertaking amounts to contempt of court, which is a criminal offence.
• If you are involved in any sort of litigation, think twice before putting anything relating to the subject matter of the case in writing as it may well have to be disclosed to the other side. If you do commit anything to writing, take the approach that whatever you write might ultimately end up being read by a judge. This case shows that this principle applies even after the claimant thought it was home and dry.