Redevelopment is probably the most common ground for a landlord to oppose the grant of a new lease to a tenant protected under the Landlord & Tenant Act 1954 (“the 1954 Act”). But what exactly is the landlord required to prove to resist a new lease, and how should it approach it to maximise its chances of success?
Protected leases can only be terminated on one of seven specified grounds under Section 30(1) of the 1954 Act. We focus here on Section 30(1)(f) (“Ground (f)”) which allows a landlord to oppose renewal on the basis that it intends to demolish or reconstruct the whole or a substantial part of the demised premises or to carry out substantial works of construction which cannot be done without the landlord gaining possession; this is known as the redevelopment ground.
If a landlord has redevelopment plans for its property, we would always recommend a pro-active approach to retain some control over the process. This will start with the service of a notice upon the tenant under Section 25 of the 1954 Act (“the Notice”), opposing the grant of a new lease. The Notice will specify the termination date for the existing tenancy; this cannot be earlier than the end of the term under the lease. At least six months, but no more than 12 months’ notice must be given to the tenant.
If the tenant serves a Section 26 Notice first, a landlord must serve a counter-notice within two months. If the landlord fails to do so, they will be unable to oppose the renewal and will have to grant the tenant a new, protected lease.
It is worth bearing in mind that if a Section 25 Notice or a counter-notice specifying Ground (f) is served and the lease is terminated, it automatically triggers the tenant’s entitlement to statutory compensation (unless the right to compensation has been contracted out and the property has been occupied for the purpose of the tenant’s business for less than five years).
Once notices have been served the next step will be to issue proceedings. The existing tenancy will only be terminated three months after the court order is made so a landlord should not leave it too late if they want to ensure that the tenant has vacated the property by the time that they are planning to start works. On average it takes nine to fifteen months from issuing proceedings to the hearing taking place and it may take further time as the courts are notoriously busy and this can affect how quickly the proceedings advance. So it is worth bearing this in mind and talking to professional advisers as the timing of the proceedings and evidence is also important when it comes to proving the intention to redevelop (see below).
In parallel to the proceedings the landlord should engage in negotiations with its tenant. This is likely to be more cost effective than going through the entire court process. There are a number of things that may make an agreed termination more attractive to the tenant. A landlord may be able to agree some form of financial settlement whereby the tenant will receive its statutory compensation early which will assist it in securing new premises. A landlord could also agree a short reversionary lease (contracted out of the 1954 Act of course!) allowing the tenant to stay in the premises a little longer, which will maximise a landlord’s rental income until they are ready to start the works.
How to show an intention to redevelop
To terminate a protected tenancy, the landlord must show that they have a firm and settled intention to carry out substantial demolition and/or construction works and that they have reasonable prospects of achieving this intention. The landlord must be able to prove this intention at the date of the hearing. This means that timing is important and that a landlord should start thinking about putting together the necessary evidence long before the hearing.
Things that will help establish an intention include:
A board resolution ratifying the project
Planning permission, or if this has not been obtained yet at least an application for planning permission, which will need to be supported by evidence that permission is likely to be granted
If other consents are required, for example in relation to restrictive covenants or right of light issues, details of steps taken to obtain such consents
Plans and drawings for the development scheme
A business plan, estimated costs and financing information
Building contract or tender for the works
The court will not examine the profitability or financial viability of the development. The court will only wish to satisfy itself that the landlord has a genuine and implementable intention to carry out the demolition and/or construction works.
An area of concern is where the landlord is not contracting to carry out the demolition and/or construction works itself and wishes to sell to another party who intends to carry out the works. If this is the case the landlord will not satisfy Ground (f) and an early strategy will need to be considered to structure arrangements with a view to the landlord carrying out the demolition and/or construction works.
The landlord will also need to show that the works will start within a reasonable time after the termination of the tenancy, as a rule, this is likely to be within three or four months. This means that a landlord will need to have obtained the necessary planning permission by that time.
What happens if a landlord is not successful?
If a landlord cannot establish a firm and settled intention at trial, the court will order the grant of a new tenancy protected under the 1954 Act. However, the court will not want to stifle development opportunities in the future. If the court is satisfied that there is a real probability that the property will be required for redevelopment during the term of the new lease it is likely to only grant a short term tenancy or insert a redevelop break into the new lease.
When deciding on the duration of the new lease, the court will carry out a balancing act between the need to provide a degree of security of tenure to the tenant and the landlord’s plans for the property. The term granted will therefore very much depend on the facts of each case taking into account the redevelopment plans.
A better way for the court to balance the parties’ conflicting interests is to insert a redevelopment break in the lease which will give the tenant security of tenure for as long as the premises are not required for redevelopment. It should be noted that, when the time comes to exercising the break, the landlord will still need to prove an intention to redevelop under Ground (f).
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.