UK: Break Notices: A Recent Development

A recent case¹ has provided guidance into the operation of Section 35 of the Landlord and Tenant Act 1954 in lease renewal proceedings where a landlord is seeking a break clause in the new lease to facilitate a proposed redevelopment.

Section 35(1) of the 1954 Act provides:-

The claimant was a lessee of commercial premises for a term of 25 years from 25 March 1977. In August 2001 it served a request for a new tenancy on the defendant landlord pursuant to Section 26 of the 1954 Act specifying 30 August 2002 as the start date for the new tenancy. The landlord did not oppose the claim for a new tenancy and the parties agreed that the new term would be 14 years. However, there was a dispute as to whether the new tenancy could include a break clause for redevelopment and, if so, the terms of the same.

The building occupied by the claimant was in need of extensive refurbishment which could not be undertaken while it remained in occupation. However, refurbishment alone did not make economic sense and the landlord contended that a wholesale redevelopment would have been the best solution. The Judge decided that redevelopment of the site, possibly together with neighbouring buildings, would be a reasonable and sensible approach. The defendant landlord had negotiated the sale of the building to a developer as it did not wish to carry out the redevelopment itself. However, by the date of the hearing contracts had not been exchanged, but the Judge was satisfied that the acquisition would go ahead at the agreed price irrespective of the outcome of the proceedings as it had been shown that the defendant landlord and the purchaser were committed to the transaction.

The Judge held that the premises were appropriate for redevelopment and he took into account the fact that the claimant would be compensated by the reduced rent payable under a lease containing a break clause and, under the circumstances, he decided that a break clause could be inserted into the new tenancy. The claimant traded as a wine bar and would need to relocate locally were the break clause to be operated. Therefore, the Judge decided that the notice period should be 11 months, and that there be a rolling break clause operable after five years. The defendant landlord and purchaser appealed contending for a break clause exercisable upon 6 months’ notice.

The defendant landlord and the purchaser, which had acquired the site following the trial, argued that once the Judge at first instance had found that the site was appropriate for redevelopment, he should have acceded to the defendant landlord’s request for a break clause operable sooner and should not have gone on to analyse the particular scheme in question. Further, they relied on fresh evidence in support of their argument that the notice period should be 6 months.

Since Courts dealing with applications for new tenancies are not deciding what happened in the past, but what terms should govern the future, they are more ready to admit evidence of post-trial events in such cases. In the subject case, the dispute turned on an evaluation of future events. The Judge decided that the fresh evidence should be admitted.

Subsequently, the Court took the view that the purchaser did intend to develop the island site and did not intend to redevelop the subject premises alone at the earliest opportunity.

On appeal the Court held that 11 months was the appropriate period of notice and decided that the defendant landlord’s redevelopment break notice was not to be served earlier than July 2007, taking account of the effect of the appeal process in protracting the legal proceedings and uncertainty.

• No application for planning permission had been made as the developer purchaser had been advised to wait until it had acquired the site before applying for planning permission.
• The defendant landlord had not exchanged contracts with the developer purchaser at the time of the trial.
• The defendant landlord at the trial had adduced no evidence of a fallback position and the wholesale redevelopment of an island site, which contained a number of business premises, including the subject premises, was the only evidence of redevelopment before the Judge.
• On appeal, fresh evidence as to the developer purchaser’s intentions for the site was allowed.
• The Judge was not impressed with the claimant’s assertion that it intended to spend substantial sums on refurbishment and would need several years’ security of tenure to recoup its investment.
• The Judge recognised that it was not the intention of the Act to give security of tenure to a business tenant at the expense of preventing redevelopment. He took the view that the defendant landlord needed to establish a "real possibility" as opposed to "a probability" that redevelopment would take place during the currency of the new lease. He contrasted this against the greater burden that the defendant landlord would have to assume in the event the break clause came to be operated.
• The notice period was to be 11 months to enable the tenant to relocate in the same area.
• The tenant would be deemed to be compensated by the reduced rent which would be payable under a lease containing a break clause.
• The Judge considered that it would be unfair for the defendant landlord to wait for 10 years in order to redevelop, but that it would not be fair to the tenant to take a lease which could be terminated "almost immediately". Having regard to the evidence in the case, he considered that the appropriate period would be 5 years.

Although each individual case of this type will turn on its own facts, it is important to keep up to date with the case law as it evolves.

© RadcliffesLeBrasseur

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