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Commercial landlords and tenants must take heed following landmark Supreme Court decision

Last month (5th December 2018), the Supreme Court reached a landmark decision that will affect commercial landlords and tenants, as head of Lodders’ Property Dispute Resolution practice, Jane Senior, and dispute resolution solicitor Lauren Smith, explain.

Landlords seeking to rely on ground (f) of the Landlord and Tenant Act 1954 to oppose a business lease renewal, and tenants who are the recipients of the relevant notice, will need to act with caution following the Supreme Court judgment in the case of SR Franses Ltd v Cavendish Hotel (London) [2018] UKSC 62.

Until last week’s decision, it has been longstanding case law (Fisher v Taylor’s Furnishing Stores Ltd [1956] 2 WLR 985) that the landlord’s motive in opposing a lease renewal on ground (f) was irrelevant, provided that the landlord had a genuine intention to carry out the works.

However, on 5 December 2018, an appeal of a judgement regarding this principal was heard. A landlord was relying upon ground (f) to oppose a tenant’s application for a renewal lease; the tenant contended that the landlord’s motive or purpose should be investigated at trial, as evidence of the genuineness of the intention to carry out the works, and the Supreme Court unanimously allowed the appeal.

What is Ground (f)?

When a business tenancy satisfies the qualifying criteria of the Landlord and Tenant Act 1954, a tenant is entitled to a lease renewal of the tenancy at lease end and the landlord can only oppose the lease renewal on certain grounds, one of these grounds being Section 30(1)(f), ground f, of the Landlord and Tenant Act 1954, which states:

“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 that he cannot reasonably do without obtaining possession of the holding”. 

In order for a landlord to satisfy ground (f), the court should consider:

  1. the entirety of the works to be carried out;
  2. the extent of the landlord’s intention to carry out the works;
  3. whether there is a reasonable prospect of the landlord carrying out the works?

The onus is on the landlord to prove it has the intention and ability to redevelop the premises.

The case: SR Franses Ltd v Cavendish Hotel (London) [2018] UKSC 62

The tenant, in this case, was a textile dealership and it occupied the ground floor and basement of the property, and used it as a retail art gallery, showroom and archive. The rest of the building is occupied and managed by the landlord as a hotel. Westminster City Council have designated the area in which the property is situated as a “special policy area” where it seeks to protect and promote certain uses. Any material change of the use would require planning consent.

The tenant served the relevant notice requesting a grant of a new tenancy, and the landlord served the relevant counter notice opposing the grant of a new tenancy relying upon ground (f).

The landlord put forward several schemes which it said represented the works it intended to carry out. The schemes were said to be too substantial and disruptive to be carried out by exercising the right of entry while the tenant remained in possession. Several schemes were put forward, but the final scheme relied upon at trial involved creating two new retail units incorporating the premises occupied by the tenant and part of the hotel.

A part of this scheme required some planning permission. However, this was then changed so planning permission was then not required. An internal wall dividing the two proposed retail units stopped two meters short of the shop front at ground floor level, and there was no external door to one of the units, so it could only be accessed through the other. There were extensive internal works, many of which were objectively useless. They included the lowering of part of the basement floor slab, which would achieve nothing other than the creation of an impractical stepped floor in one of the units, the repositioning of smoke vents for no reason, and the demolition of an internal wall at ground level followed by its immediate replacement with a similar wall in the same place.

Change of use

It was common ground that the proposed works had no practical utility, as although the works themselves required no planning permission, permission would have to be sought for the change of use, which the landlord did not intend to seek.

Appeal

The judge in the lower courts found that the landlord intended to carry out works if they were necessary in order to get rid of the tenant, but that it did not intend to carry out the works if they were not necessary to do so for that purpose, i.e. it would not have been necessary for the landlord to carry out the works if the tenant agreed to go voluntarily.

The landlord gave evidence that in the longer term, it was hoped that the tenant vacating would facilitate a more ambitious plan of works to add 28 bedrooms to the hotel, but these further works were not relied upon for the purpose of ground (f).

It was found that ground (f) requires an examination of what the landlord intends to do, and whether it intends to do it, not why the landlord may intend to do it. This was appealed and judgment was handed down.

Supreme Court judgement

The Supreme Court unanimously allowed the appeal, finding that the landlord could not rely upon ground (f). The court considered that ground (f) required a firm intention to carry out the works, and the Landlord’s motive is irrelevant except to test whether the intention required by ground (f) exists. The fact that the landlord admitted it would only carry out the work if this was needed to remove the tenant counted against it. The test was whether the landlord would carry out the work if the tenant left voluntarily.

A landlord’s motive or purpose for redevelopment may now be investigated at trial as evidence for the genuineness of his professed intention to carry out the works. The Supreme Court recognised that it should not ignore the possibility that landlords will disguise their intentions for redevelopment more effectively. The court has to proceed on the footing litigants are honest, or if they are not, that they will be found out by experienced judges who go on to hear these cases.

Landlords seeking to rely on ground (f) to oppose a business lease renewal will need to act with caution following this Judgment. Given the decision, landlords now need to ensure when planning redevelopment works in conjunction with ground (f) that they ensure that the works have some sort of genuine purpose or benefit beyond a desire to remove the tenant; they should ensure that they have written records of the decision-making process to back this up. The landlord must show it has an intention to undertake the works for a reason other than simply removing the tenant; apart from this, the landlord’s motive and for example, the commercial merits of the proposed works remain irrelevant. Some commentators have suggested that this decision may make it more likely that landlords will seek to exclude the lease from the 1954 Act so that a tenant does not have the right to renew.

For more information

Contact Lodders dispute resolution practice to request a copy of our legal briefing on the case.

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For more information on this article, please contact Jane Senior on 01789 206149 or via email.