No Opt-Out by Option: Park Cakes Limited v Caterpillar Property Limited & another

Summary

A recent County Court judgement has confirmed that a tenant-only ‘option to renew’ in a business lease does not disapply the protection of Part II of the Landlord and Tenant Act 1954.

It was held that an option to renew is not an “agreement for the grant of a future tenancy” for the purposes of section 28 unless and until it is exercised.

 

The facts

Park Cakes Limited (the tenant, claimant and producers of Colin) occupied two commercial premises owned by Caterpillar Property Limited and Caterpillar Property Holdings Limited (the landlords and defendants). The leases were due to expire in June 2027, and each contained a tenant-only option to renew for a further 10-year term, exercisable on notice and subject to conditions. The tenant occupied the premises for the purposes of its bread and pastry manufacturing business, thereby satisfying section 23(1) of the 1954 Act, qualifying it for security of tenure under Part II.

The landlords argued, however, that the existence of the option to renew meant the leases were not protected by security of tenure, relying on section 28, which disapplies Part II where there is already an agreement for the grant of a future tenancy. The tenant contended that the leases remained protected, notwithstanding the option to renew.

 

The law

Part II of the 1954 Act is intended to provide automatic security of tenure to qualifying business tenants. Under section 23(1), protection applies to business tenancies exceeding six months, subject to limited exclusions. As the protection is automatic, "contracting out" of the Act is expressly permitted only through the statutory procedure set out in section 38A.

However, section 28 provides a narrow exception, disapplying Part II where the parties have agreed in writing to the grant of a future tenancy on specified terms and from a specified date.

If section 28 applied in this case, the tenant would have no statutory right to renew, and the landlords would not need to rely on any of the section 30(1) grounds to oppose renewal. The tenant would also be at risk of losing possession at lease expiry if the option to renew was not validly exercised.

 

The decision

The Court held that the option to renew was not an agreement for the grant of a future tenancy within section 28. This was due to three key findings:

First, an option to renew in itself does not obligate either party to take any action. Judge Bond stated that an option is not the same as an agreement for the grant of a future tenancy. An agreement for a grant of a future lease is only met when the option to renew is exercised.

Secondly, the Court held that the existence of a contractual renewal mechanism that may or may not be exercised in a lease does not displace the statutory renewal regime under the 1954 Act. Parliament deliberately set out a uniform statutory procedure for renewal, balancing landlord and tenant interests, and did not permit parties to substitute it with their own alternative process.

Finally, even if the parties had intended by the inclusion of the option to renew that the tenant was not protected by Part II of the 1954 Act, it did not include the statutory safeguards that are required when parties contract out and therefore were void under section 38A. The tenant was not warned about nor required to acknowledge the rights that they were required to give up.

 

Practice points

In practice, this means that:

• Options to renew are not, on their own, enough to circumvent Part II of the 1954 Act.
• Options to renew will only create a binding bilateral agreement that attracts the consequences of section 28 once an option is exercised.
• If parties intend to exclude the 1954 Act by way of the section 28 agreement procedure, they should comply strictly with the section 38A contracting-out procedure.

The case is up for appeal, which is due to be heard this week, so stay tuned to our blog for updates.