UK: 1954 Act Business Lease Renewal – Can Tenants Require Short Terms In A Recession?

The global financial crisis has had a subtle but important influence on business lease renewals under the Landlord and Tenant Act 1954 ("the 54 Act"). In the recession, lease lengths have become shorter with most new leases now being less than 5 years. The average length of a lease last year was just 4.8 years, according to the latest BPF/IPD Annual Lease Review. More than three-quarters of all leases are now five years or fewer in length, compared with 63% in 2010. Taking breaks into account, leases have shortened by three years over the course of the crisis. Obviously this depends on the property and there are some anomalies - despite the gloom on the high street, retail sector leases are still averaging 10 years.

Shorter leases often increase the upward pressure on bank lending rates while depressing the capital value of freeholds. The conventional trade off for landlords is a higher rent. The tenant pays more for the privilege of more flexibility and the extra rent compensates the landlord for the loss of certainty. However, with the rise of occupier insolvency, true rents are also under pressure (particularly when rent free periods and other inducements are stripped out). Therefore landlords are faced with the reality of shorter leases without the compensation of higher rents.

However, in this climate it isn't surprising that where tenants seek a lease renewal under 54 Act they are looking for shorter extensions. There is no bar on multiple applications under the 54 Act and so a tenant can, for example, request a series of 3 year extensions. After each 3 year term a new application can be made and so on. Alternatively, the tenant can request short recurring break clause periods. In fact, under the provisions of the Act there is no fetter on the tenant consecutively applying for a series of shorter terms. This doesn't mean that the Tenant has the right to a short lease. Naturally the 54 Act allows the then tenant to apply and the Court then determines the length of term (in the absence of agreement).

Recessions generate certain kinds of case and last time we saw a run of cases on this subject was in the wake of the downturn from 1989 to 1993. The cases in the early 90's established a number of important principles which remain highly relevant for the present turbulent financial conditions. The 54 Act is not as tenant friendly on this issue as some believe.

The Statutory Framework

The 54 Act itself provides limited guidance, s.33 provides that:

Under the 54 Act, the maximum term which can be granted by the Court is 15 years (it used to be 14 years before the 2003 reform, hence the reference to this period in much of the case law) . However the landlord and tenant can agree a longer term. In the absence of agreement (subject to the maximum) the Court therefore determines the term on the basis of what is reasonable.

So what constitutes "reasonableness in all the circumstances" and when is it reasonable for a tenant to request a short term (of say 1/2/3 years)?

In normal circumstances the court is unlikely to order the grant of a new tenancy for a term longer than that for which the tenant asks; but if the term proposed is so short as not to give the landlord reasonable time in which to re-let, the court has discretion to order the grant of a longer term than that proposed by the tenant.

This would also apply to a term so short that it would diminish the value of the reversionary interest. If the tenant's application to the court was on the basis that the tenant was seeking a new term of ten years, the court declined to permit the tenant to change its mind on the penultimate day of the hearing, and seek a term of three years only.

The words "reasonable in all the circumstances" entitle the court to take into consideration all material circumstances. In approaching the question of duration, the court must strike a reasonable balance between conflicting considerations including:-

• The length of the old tenancy;
• The length of time during which the tenant has held over after the end of the last tenancy;
• The tenant's business needs including planning for retirement;
• Any hardship that would be caused to either landlord or tenant; • The objective of the Act to provide the tenant with security of tenure;
• Whether the landlord intends to occupy the property in the near future;
• The prospect that the property will be redeveloped in the near future;

The case law dealing with these and other considerations reflects the economic tide...

Cases from the 50s -- the birth of the 54 Act

In the past, tenants preferred longer terms and landlords preferred shorter terms; a reverse of the current recessionary trend. This was particularly the case in the years following the introduction of the 54 Act.

So for example:- in the important early case (advocated by Charles Russell QC a relation of this firm), Betty's Cafes Ltd v Phillips Furnishing Stores Ltd (1958), the County Court ordered a new term of 14 years (requested by the Tenant). However this was reduced, after the landlord appealed, to a five-year term. The evidence showed that the conventional duration of terms in those days was usually eight years. However the House of Lords decided that the burden was on the Landlord to show the tenant's request was unreasonable. Lord Morton supported the view that it was reasonable to allow the tenant to request any particular lease length unless the Landlord was able to show some particular circumstance to [reduce/increase] the length.

Incidentally the landlord's request for a 5 year term was held to be reasonable, not because the Law Lords wanted to adjust the lease length to the perceived normal term but because the landlord wanted to rely on ground 30(I)(g) (i.e. the landlord wanted to occupy the premises for its own purposes). The Court decided that the landlord was able to satisfy the ground (i.e. it did want to occupy for its own purpose) BUT needed to wait 5 years (under s.32) to be able to rely on this ground under s.30(2) and therefore a shorter term of 5 years was reasonable. In a further twist the landlord's further ground of opposition (redevelopment under s 30 (1) (f)) was successful and the landlord obtained possession on this basis.

Although an early decision, with the weight of the House of Lords, Betty's Cafes has been the leading case ever since with the principles set down by the Lords expanded from time to time.

In London & Provincial Millinery Stores Ltd v Barclays Bank Ltd (1962) the Court of Appeal held that in exercising its discretion under s 33, the Court must take into account all relevant factors, one such factor being the intention of the landlord to reconstruct. The nine-year lease was reduced, on appeal, to a 12-month lease which reflected the time the landlord needed to finalise its intention to redevelop under s. 30(I)(f).

The court can have regard to the fact that the current tenancy has been the subject of a long continuation tenancy. It has been held that the court can properly have regard to the landlord's "near miss" under section 30(1)(g) in opposing the tenant's application for a new tenancy. In Upsons Ltd v E Robins Ltd (1955) the tenant was a multiple retailer with approximately 250 shops. The landlord had only one freehold property and desired a short term as he wished to occupy the premises himself owing to the termination, in the near future, of his own lease of another shop. The Court of Appeal held that it was legitimate for the court to consider the balance of hardship to the landlord if a long term were granted.

In Wig Creations Ltd v Colour Film Services Ltd (1969) 211 EG 923, the landlord had purchased the interest only three years previously and the Court of Appeal upheld the determination, at first instance, of a three-year term despite evidence of the hardship that was shown to the tenants who had sought a 14 year term.

Cases from the last recession 1989 to 1993

In the last recession the economic tide had turned and in the 1990s tenants then looked for shorter terms and landlords longer terms. Nonetheless the underlying considerations remains the same, in determining the reasonable length of the new lease in a recession (in all the circumstances) the court also has to balance the landlord's desire for certainty with the tenant's wish for flexibility.

However in a number of important cases in this period the tenant failed to convince the Court that a short term was reasonable.

In Richard Shops Ltd v Barclays Nominees (George Yard) Ltd (unreported September 30 1993). The tenant argued that the landlord's ongoing refurbishment of the building (where the tenant's holding formed a part of this building) created potential disturbance. Accordingly, the tenant requested a five-year term or a 14-year term with five-year breaks. The landlord argued for a term of 14 years with no breaks. Roger Cooke J held, having regard to the length of the previous lease and other factors, the new lease was to be for a term of 14 years with rent reviews every five years (upwards and downwards), but with no break clauses. The rent would be discounted by 10% for one year to reflect the disruption caused by the landlord's works.

In Charles Follett Ltd v Cabtell Investments Ltd [1986] .The tenant served a notice under s26 of the 54 Act and requested a further term of 14 years at the same rent with a rent review after seven years. The 54 Act process then dragged on for 3 years during which market conditions changed and after three years the market rent was thought to be £57,000. The tenant then changed its mind and amended its request to a new term of one year only at a rent of £57,500. The landlord formed the view that the rent should be £125,000 for a 10-year term with the review as originally proposed. Terence Cullen QC (sitting as a deputy judge of the High Court) held, inter alia, that it was reasonable to order a new tenancy for 10 years, but to give the tenant a single option to break. The break clause to be included would allow the tenant to break by giving notice to do so within the first month of the new lease, the lease to terminate six months thereafter.

In Ganton House Investments v Crossman Investments (1993), the tenant requested 12 months only and the Court ordered 14 years !. The case involved a betting shop under a lease for 21 years originally granted in 1971. The landlords applied for a term of 25 years, but accepted that the maximum duration that the court could grant would be 14 years and the tenants were seeking a term of 14 years. The tenant changed its position to request a 12-month term. At the hearing, the landlords argued that they were entitled to look to the capital value of their premises and that it would be diminished if a short term was granted, while the tenant argued that it desired to relocate. Judge Brandt held, that it was desirable in the letting market that a degree of stability existed and that degree of stability was served by the granting of a long lease. In this context the reasoning in Charles Follett Ltd v Cabtell Investments Ltd was found by the judge to be compelling. A 14-year lease with a rent review every five years would be granted with a tenant's break clause at six months, with the tenant to remain in possession for six months thereafter.

Once again in the 90s recession the tenant's need for flexibility and a shorter lease was considered in Merseyside Glass Ltd v J D Williams (1994). In this case shop premises were demised from a term of 14 years. The tenants applied for a new tenancy and argued for a new lease of three years' duration, while the landlords contented for a longer lease. Urquhart J held, inter alia, that it was for the applicant-tenant to persuade the court that the change it proposed from the previous term of 14 years to three years was fair and reasonable and it was not for the court to protect the tenant from market forces. In the circumstances, a lease for nine years would be ordered with a break clause enabling the tenant to terminate the term at the end of six years.

However a very different decision was reached In the case of CBS United Kingdom Ltd v London Scottish Properties Ltd [1995] where the tenants of a warehouse and office premises were holding on a continuation tenancy following the expiration of a 10 year lease. The tenants sought a very short (12 months) term but the landlords claimed a 14 year term. The tenants were in the process of moving to a new location, while the landlords (who had a head tenancy for 150 years at a substantial rent) argued that the capital value of their interest would be materially diminished if a term shorter than 14 years was granted.

Micklem J held that, while the premises might be of significantly less value if the tenants' contention for a short lease were accepted, the short term would be granted. The persuasive factors were:

• the landlords would have 11 months to find new tenants;
• the prospect of a void was small;
• the present tenants would be in difficulties in disposing of what would have been a 14 year lease;
• insufficient evidence was submitted in relation to the suggested diminution of the market value; and
• the purpose of the 54 Act was to protect the tenant.

Further, it was perfectly fair and proper for the landlord to seek to maximise the value of his investment and the tenant was not to be protected unduly against the market, but the court had to decide what was reasonable in the circumstances and the matter ought to be decided with fairness and justice.

However the effect on the value of the landlord's reversion of the granting by the court of a short lease is a factor to which the court can have regard in determining the length of the new lease. In Rumbelows Ltd v Tameside Metropolitan Borough Council [1994] the tenant occupied substantial retail premises under a 20 year lease. Ihe tenant sought a five-year term, while the landlord wanted a 14 year term. In the recessionary conditions of the 90s, the tenant argued it could not make long-term predictions as to the future of their business and were concerned about continuing liability for rent in the event they were given a long term and were forced to seek of assignment of the remainder of the new lease.

It was argued on behalf of the tenant that the primary purpose of the 54 Act is to protect the tenant; if the tenant desires only a short lease the court should not interfere (relying on CBS United Kingdom Ltd v London Scottish Properties Ltd). The landlord's case was that the value of the shopping parade, which it owned, would be diminished by the grant of a five-year term and that the landlord would be disadvantaged because there would be only an interim rent for the period between the end of the five-year period and the commencement of a new tenancy. Moreover, it was inconvenient and costly for the landlord to have to deal with an application for a new tenancy as frequently as every five years.

Judge Clemence Goldstone QC held that in exercise of the discretion conferred by s 33 of the 54 Act, the court should strike a balance between the degree of protection to which the tenant is entitled in the exercise of his business interests and the need to ensure that the decision is neither unfair on, nor oppressive to, the landlord. The court had the power to impose a longer tenancy than that requested by the tenant. Although expert evidence revealed a mood of cautious optimism for the future, the state of "market forces" owing to continuation and strength of economic recovery from recession was too uncertain and difficult to predict to be a factor otherwise than of limited value. The problem of original tenant liability and difficult of assigning the lease, including the possibility of having to pay a reverse premium to an assignee were relevant considerations. While the length of the original lease was a factor to be taken into account, the context in which that lease was granted, namely in order to finance the development of which the premises were and remain a part, was more significant. The potential drop in value of the shopping arcade had to be considered against the value of the landlord's property portfolio as a whole as the instant arcade represented only 7.5% of the value of such portfolio. As a lease of 10 to 14 years could disadvantage the applicant, a reasonable period in this instance was a term of five years as this gave proper protection to the tenant without being unfair on, or oppressive to, the landlord.

Finally in the case of Merseyside Glass Ltd v J D Williams [1994] the Court, noted that the value of the landlord's reversion would be affected by accepting the tenant's argument for a new term of three years. The need for a degree of stability in the letting market and the effect of the granting of a short term on the capital value of the landlord's premises were factors which the court considered persuasive.

The Current Recessionary Climate - lease length cases to come?

The cases from the last recession demonstrate that tenants cannot always have their way in relation to lease length. On this basis we now face similar circumstances after the intervening years of boom. We have already seen the start of a new series of cases on the subject.

The Court touched upon the subject In Somerfield Stores Ltd v Spring (Sutton Coldfield) Limited [2011] and in Humber Oil v Associated British Ports [2011]. Given the stream of cases in the 1990s we can expect to see a series of new cases as the financial crisis continues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.