UK: Landlord & Tenant, March 2010 - Opposing Lease Renewal Proceedings On The Ground Of Redevelopment

Last Updated: 30 September 2010
Article by Nitej Davda

Originally published in March 2010

Redevelopment is (alongside the ground of owner occupation) perhaps the most common of the bases upon which a landlord might seek to deny a tenant's entitlement to a new lease of business premises. The following serve as some useful points to remember when a landlord seeks to rely upon the ground of redevelopment for denying a tenant a new lease of business premises.

Timing

If a business tenancy is brought to an end by service of a section 25 notice it must specify any ground of opposition relied upon. If a business tenancy is brought to an end by the tenant serving a section 26 request then the landlord must, if it wishes to rely upon the ground of redevelopment (or indeed any of the grounds of opposition specified in the Landlord and Tenant Act 1954 (the 1954 Act)), serve a counter notice within 2 months of the date of service of the section 26 request specifying the ground (or grounds) of opposition relied upon.

Neither section 25 notices nor counter notices can be amended after the event and the 2 month time frame for serving a counter notice cannot be varied. The landlord must ensure that it does not fall foul of these strict time limits, otherwise any intended objection to the grant of a new lease will fall down at the first hurdle.

Break clauses

Leases will sometimes contain a redevelopment break clause. The effect of exercising a redevelopment break clause is to bring to an end the contractual term of the lease but it does not by itself have the effect of ending a tenant's rights to remain in occupation under the 1954 Act. Therefore a landlord will also need to serve a notice under the 1954 Act. A section 25 notice indicating a landlord's intention to redevelop can serve to both break the contractual term of a lease and bring to an end the tenant's rights to occupy under the 1954 Act, though this will ultimately depend upon the precise wording of the break clause in the lease.

What is redevelopment?

The statutory ground of redevelopment encompasses demolition, construction and/ or reconstruction. Within the 1954 Act there are 6 possibilities for a landlord:

  • The landlord intends to demolish the premises comprised in the holding;
  • The landlord intends to demolish a substantial part of the premises comprised in the holding;
  • The landlord intends to reconstruct the premises comprised in the holding;
  • The landlord intends to reconstruct a substantial part of the premises comprised in the holding;
  • The landlord intends to carry out substantial works of construction on the holding;
  • The landlord intends to carry out substantial works of construction upon a substantial part of the holding.

Before serving a section 25 notice indicating an intention to redevelop a landlord must have in its mind a clear idea of the works it plans to carry out that form the basis of the redevelopment proposal, and should ideally seek advice from its architect, planning consultants and legal team to ensure that the proposed redevelopment has the best chance of satisfying the ground contained in the 1954 Act.

The meaning of 'premises', 'holding' and 'substantial'.

The word 'premises' is given a wide meaning and so can include structural and non structural elements of a building. It does not include open land with no development upon it however. Such land can be the subject of opposition on the basis that works of construction are going to occur upon on it, but cannot be the subject of opposition on the sub grounds of demolition or reconstruction.

'Holding' is given a wider definition and means the land and/or buildings comprised in the tenancy.

'Substantial' is not defined within the 1954 Act and a common sense approach is taken to considering whether works are to be treated as substantial in any particular case.

Works outside of the demise

When considering whether to deny a tenant a new lease on the ground of redevelopment the court will be concerned principally with the works that are to be carried out on the tenant's demise. It may be that a large scale redevelopment is being proposed on land adjoining that demised to a tenant. If however the development scheme barely touches upon the tenant's demise, it may be that those works on the tenant's demise are in themselves insufficient to entitle the landlord to obtain possession of it. Again this is a matter that a landlord must give serious consideration to at the outset and take professional advice on prior to serving any notices upon a tenant. A failure to do so may have very unsatisfactory (and expensive) consequences.

Feasibility

It is not sufficient that works within a proposed scheme fall within one or more of the 6 limbs of the redevelopment test. That they do will be immaterial if there is no possibility of the works being carried out in practical terms. What the landlord has to show therefore is that as well as falling into one or more of the categories that make up the redevelopment test the works are feasible in all respects. This means that the landlord will need to establish or demonstrate, amongst other things:

  • That planning consent will be forthcoming;
  • That any conditions that are or might be attached to planning consent can be complied with; and
  • That the landlord can fund the redevelopment.

The more of these hurdles to carrying out the proposed redevelopment that can be overcome at an early stage, the more likely it is that the landlord will be successful in its claim for possession.

Intention

The landlord must also have a genuine intention to carry out the works of redevelopment. It is not sufficient for the landlord to have an intention to sell all its interest in the premises for someone else to redevelop. This would not satisfy the legal test. It is the landlord's intention that is relevant for the purposes of the 1954 Act.

Timing when all this is considered

The question of whether the landlord can satisfy the ground of redevelopment in the 1954 Act will be judged at the date when the court comes to determine the question, not at the time when the section 25 notice or counter notice is served. This may not, however, be the position as regards any break clause that was exercised immediately prior to, or at the same time as, the service of such a notice or counter notice. Landlords need to ensure that any conditions (including as to intention) that might be required in order to validly exercise a redevelopment break clause are also satisfied. This may place an additional burden upon a landlord at the outset. Again legal advice should be sought by landlords at this initial stage to ensure that problems later on down the line are avoided.

If a landlord is able to satisfy the test for redevelopment within the 1954 Act the court has no discretion. It must award the landlord possession of the whole of the premises demised to the tenant, unless one of the situations in the paragraph immediately below this one applies.

Section 31A of the 1954 Act

Section 31A of the 1954 Act contains two exceptions to the general rule which is that if a landlord is able to satisfy the redevelopment test it will be granted possession of the premises demised to a tenant. Those exceptions are:

  • That the landlord can carry out the works (with no significant interference or additional cost) with the tenant in situ; or
  • That the tenant is willing to take a new tenancy of part of the premises originally demised to it (and such a grant would not cause significant interference or additional cost for the redevelopment).

If a tenant intends to rely upon one of these exceptions it must normally indicate such an intention at an early stage in the court process.

A successful landlord

Assuming a landlord is successful at trial and a court determines that it has satisfied the ground of redevelopment two things will happen.

The first is that the court will make an order for possession of the demised premises. That order will take effect three months after the date of the court's decision. Therefore the tenant has a period of three months from the date of a court's decision in which to wind down its business from the demised premises.

The second is that the tenant will ordinarily be entitled to receive compensation upon it leaving the demised premises. The amount of compensation a tenant is entitled to is based upon a combination of the rateable value of the premises and the number of years the business that the tenant operates has traded from the premises.

Sometimes leases will provide that no compensation is payable. Such clauses are only valid if clearly drafted and in circumstances where, by the date for possession, the business will have operated out of the demised premises for no more than five years.

Getting the Scheme Right: Forward Planning

If a landlord wishes to terminate a tenant's rights of occupation on the ground of redevelopment it must think carefully before starting the 1954 Act procedure. Tenants are entitled to receive certainty and therefore once the court process has commenced the timetable leading to a determination of whether the landlord has satisfied the ground of opposition in the 1954 Act will be a tight one. A landlord who has not planned ahead can find itself in a very difficult position if it does not consider at the outset what it might have to demonstrate in order to secure possession. Such inaction by a landlord at the outset can often lead to incurring greater costs than otherwise, and can also increase the prospects of the landlord's case failing. In these types of cases inaction at an early stage is very much a false economy.

In light of the above it is imperative for landlords who intend to rely upon the redevelopment ground to take early advice from architects, planning consultants and lawyers to ensure that any redevelopment proposals stand the best chance of coming to fruition.

This series of briefings is aimed at landlords and tenants of commercial property and future editions will focus on other aspects of the lease renewal process as well as common problems that are experienced during the course of the landlord and tenant relationship.

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