Redevelopment in Aisle '54

Summary

Commercial landlord and tenants should be aware of this recent county court decision which has the potential to make it more difficult for lease renewals to be opposed on the basis of redevelopment.

 

General

A tenant with security of tenure under the Landlord and Tenant Act 1954 (the 1954 Act) is entitled to a renewal lease unless its landlord can prove one of seven grounds of opposition. In practice, the most common of those grounds is redevelopment.

 

The redevelopment test

The test for redevelopment under the 1954 Act is: “That on the termination of the current tenancy the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises or to carry out substantial work of construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding.” (s.30 (1)(f) – "Ground (f)").

 

What is the "holding"?

Under Ground (f), a landlord needs to prove that it intends to redevelop the "holding" - this consists of those parts of the demised premises which are occupied by the tenant at the relevant time for the purposes of its business. This expression is used in different parts of the 1954 Act and, whilst the meaning is the same in each case, it can be applied at different times for different purposes.

One such use is under s.32(1) of the 1954 Act, where an order by the court for the grant of a new tenancy is of the "holding." If such a grant would be uneconomic for the landlord because it would leave it with empty unlettable parts of its building, a landlord has the ability under s.32(2) of the 1954 Act to require its tenant either to take a lease of the whole of the originally demised premises or to not renew at all.

 

What is the "relevant time" for assessing the holding?

The relevant time for assessing the extent of the holding is the date of the hearing.

Often in Ground (f) cases, the question of whether the works proposed by the landlord satisfy the test in s.30(1)(f) is dealt with as a "preliminary issue", i.e. at a separate hearing before the main trial. The advantage of this is that it can save the costs of determining the terms of a renewal lease, as these only have to be incurred if the landlord fails on the preliminary issue. However, one consequence of this is that the scope of the holding can be (very) different at: i) the hearing of the landlord's redevelopment claim; and ii) the hearing of the subsequent lease renewal claim.

 

The facts in this case

Sainsbury’s (S) was the tenant of premises consisting of a basement, ground floor and three upper floors. For many years, S had operated a supermarket from the ground floor only; the other floors were all vacant.

S's landlord (MAL) wanted to redevelop the premises to allow the upper floors to be used as offices. This included works to lower the basement floor and works on the ground floor to widen the staircase to the upper floors. Otherwise, the ground floor occupied by S would have been unaffected by the works.

 

Can a tenant frustrate a landlord's plans by altering the extent of the holding?

This was the novel issue raised by this case. A week before the preliminary issue hearing of MAL's redevelopment case, S sought to manipulate the extent of its holding by vacating the area which would be affected by the intended works (which S had previously used for storage) and continued to occupy the rest of the ground floor. The effect of this was that none of MAL's intended works would be to the (newly reduced) holding. S argued that MAL's claim must therefore fail.

To counteract this, MAL tried to rely on s.32(2) of the 1954 Act, i.e. to make the holding the entire demised premises. It argued that this allowed the works to the basement and ground floor to be taken into account in assessing whether the test under Ground (f) had been met.

However, s.32(2)(b) provides that it applies to references to the holding "in the following provisions" of the 1954 Act. S argued that this meant that s.32(2) could not apply to the definition of holding in s.30 as that is a preceding rather than a following provision.

The court agreed with S on the literal interpretation of s.32(2)(b), the effect of which was that the extent of the holding for the purposes of Ground (f) was only those parts that S was actually occupying at the hearing of the preliminary issue.

That was the case even though, if S's redevelopment claim failed, S would be entitled, before the lease renewal hearing, to re-occupy other parts of the demised premises such that those enlarged parts would then form part of the holding for the purposes of those later renewal proceedings. In other words, S was able to have its Taste the Difference cake and eat it!

As a result of this, MAL's works to the basement and ground floor had to be discounted and so the redevelopment claim failed. The judge went on to hold that, even if he was wrong on the holding issue, all the works relied on by MAL were not sufficient in any event.

 

Implications of this case

This is another "tenant friendly" decision following S Franses Ltd v Cavendish Hotel (London) Ltd ([2019] A.C. 249) in which the Supreme Court held that the relevant test is whether the landlord's works would still be carried out even if its tenant left voluntarily, i.e. a landlord cannot design its works purely in order to prove Ground (f).

Indeed, at first blush, the prospect for a landlord of its tenant being able to stymie its redevelopment plans by vacating the specific parts of the demised premises where works will be carried out is stark.

However, the impact of this aspect of the decision may prove not to be as substantial as it first appears.

Firstly, a tenant which sought to take this approach would still have to be able to operate its business from the remaining parts of the demised premises. This will often not be possible and if the tenant went too far and vacated parts that it did need to operate its business it may well find that it then didn't have security of tenure under the 1954 Act at all.

Secondly, if a tenant can vacate those parts which are going to be affected by the works but still be able to operate its business from the remainder of the demised premises then that suggests that the works are probably not that substantial in the first place, i.e. the landlord may well have failed to make out Ground (f) in any event (as was the case in this decision).

In terms of the steps which a landlord can take to combat this potential issue, obviously it cannot amend its scheme to come within Ground (f) as that would not pass the test as set out in Franses.

Given this, one possible option for a landlord in similar circumstances would be to seek to have the redevelopment claim and the renewal claim heard together, i.e. to argue that it would be unreasonable to have the redevelopment claim tried as a preliminary issue.

If that argument succeeded, the redevelopment claim would be heard immediately before the renewal claim and so it then wouldn't be possible (or at least would be much more difficult) for the tenant to manipulate the extent of the holding as S was able to do in this case. Whether a court would allow this remains to be seen.

It is also worth bearing in mind that this is a County Court decision which will not be binding on other courts and may still be subject to appeal.