UK: Landlords Break Clauses In Business Leases

The purpose of this article is to examine how business leases are treated differently than other leases or tenancies and particularly how the statutory provisions preventing agreements excluding the protection of tenants by statute have been interpreted by the courts in different situations.

What Leases Are Covered?

The statute which relates to business leases is the Landlord and Tenant Act 1954. Tenancies covered by that Act are tenancies of premises which are occupied for the purposes of a business carried on by the tenant or for those and other purposes. A business for these purposes includes a trade profession or employment and, indeed, any activity carried on by a body of persons corporate or unincorporate. Consequently a limited company, partnership, and club or a sole trader would be covered. Not only does it include the ordinary meaning of a business but it also covers, for example, a charity shop or tennis club. The absence of a profit motive is not fatal. However the tenant must be in occupation and a tenant sub-letting lock-up garages is not in occupation for these purposes and his tenancy would therefore be excluded from the protection of the Act.

Such tenancies will usually have the benefit of a written Lease, which will provide for a contractual term. When that term has expired the 1954 Act provides that the tenancy shall not come to an end unless terminated in accordance with the Act. The tenant may apply to the court for a new tenancy. There are certain requirements that the tenant or landlord shall have served a relevant notice and the tenant shall have served a counter notice. The tenant must apply to the county court between two and four months after service of the notice. Subject to those procedural requirements the tenant will be entitled to a new lease but the landlord can object to the tenant's application on one of only seven grounds.

Grounds 1 to 3 relate to breaches by the tenant of his obligations as to repair, payment of rent or other substantial breaches.

Ground 4 applies where the landlord has offered the tenant suitable alternative accommodation. For these purposes suitable means that it is suitable so as to preserve the goodwill of the tenant's business.

Ground 5 applies where the premises occupied by the tenant are in fact sub-let to him and form part of a larger building which the landlord wishes to let as a whole at a greater rent.

Ground 6 applies when on termination of the term the landlord intends to demolish or reconstruct or carry out substantial work of construction and could not reasonably do so without obtaining possession.

Ground 7 applies where on termination the landlord intends to occupy the premises for the purposes or partly for the purposes of the landlord's business or as his residence. This ground is only available to the landlord when the landlord has been the owner of the freehold for five years.

The terms of the new lease as to rent and otherwise will be such as may be agreed by the landlord and tenant or if they cannot agree, settled by the courts. The rent will broadly be the open market rent disregarding the value of the goodwill of the tenant's business. The other terms including the period of the new lease will be such as may be agreed between the landlord and tenant or if the court has to settle such terms they will be settled having regard to the existing terms and all other relevant circumstances. It will be up to the party who seeks to deviate from the existing terms to justify the change.

The statute prevents landlords avoiding the terms of the Act. Thus, a notice to quit given by a tenant or a surrender by a tenant shall be of no effect if the notice is given by the tenant before he has been in the premises as a tenant for one month or the surrender has been effected by a deed or pursuant to an agreement made before the tenant has been in occupation as a tenant for one month.

Section 38 prevents landlords from depriving tenants of the right to a new Lease under the Act. It provides that any agreement relating to a tenancy covered by the Act shall be void in so far as it precludes the tenant from making an application or request under the Act or provides for the termination or the surrender of the tenancy in the event of his making such an application or request or for the imposition of any penalty or disability on the tenant in that event. Subsection 4 was added in 1969 and allows both parties to make a joint application to the court for approval by the court of an agreement between them to exclude the right to a new Lease under the Act.

However it is interesting how the courts have applied section 38 in certain circumstances.

Section 38 only makes sense if it is interpreted to mean that an agreement precluding the tenant from renewing the lease after the expiration of the contractual term is void. However, it is noticeable that the courts have found on a number of occasions that an agreement to surrender the lease by a tenant is void, but an option exercisable by the landlord to break the contractual term of the tenancy is valid.

In the case of Joseph v Joseph there were three partners in a firm. One wished to leave the firm and they agreed to dissolve the partnership. It was a term of the dissolution agreement that the two continuing partners would surrender the Lease of the premises from which the business was carried on in two years time. This would have been six years before the Lease would ordinarily have expired. This was held to be a void agreement because it precluded the tenant from applying for a new tenancy at the end of the contractual term.

In Allnatt London Properties v Newton a Lease was entered into which included a clause providing that if the tenant should wish to sell his business and assign the Lease he must first offer to surrender the Lease to the landlord. The tenant did offer to surrender and the landlord accepted. The tenant later withdrew his offer and the Landlord sued the tenant in an attempt to enforce the agreement. The court held that the agreement to surrender was void under section 38.

We could be forgiven for thinking that an agreement whereby the landlord could bring an end to the contractual term of the Lease would be equally void. However the Court has not applied the same principles to landlord's break clauses as it has to tenant's agreements to surrender.

In National Car Parks v Paternoster Consortium Ltd a Lease had been entered into with a clause permitting the landlord to exercise an option to break the term of the Lease bringing it to a premature end, in the event that the landlord wished to obtain possession of the tenant's premises for the purposes of redevelopment. The Court of Appeal decided that this agreement was not void. However, whilst the Court decided that it brought an end to the contractual period of the Lease, the landlord must still -

1. serve a notice to quit under the 1954 Act; and
2. satisfy the court that it had a genuine intention and desire to redevelop; and
3. prove that he needs possession of the premises for that purpose. (Ground 6 of the Lanlord’s grounds of objection to a new Lease).

In my respectful opinion, the difference in approach cannot be justified. Section 38 applies to Agreements, which preclude a tenant from exercising his right to renew his Lease at the end of the contractual period, within the limitations imposed by the Act. If the approach of the Court of Appeal in the case of National Car Parks is correct, then, logically, in the cases of Joseph and Allnatt London Properties, the agreement to surrender should surely have brought an end to the contractual term of the Lease but not the statutory Lease created by the 1954 Act. The statutory Lease would presumably have to be brought to an end by following the procedure in the Act. Presumably that would require the tenant to serve a request for a new lease but not to apply to the courts within the time limit for a new lease. Alternatively it might require the landlord to serve a notice to quit and the tenant not to serve a counter notice or make application to the Court within the time provided, for a new lease. Rather cumbersome, but the Act does provide that such Leases do not come to an end until that procedure is followed.

However, as the law stands now, it would seem that if a Lease is granted by a landlord in circumstances covered by the 1954 Act and the lease contains provision for the landlord to break the term of the Lease in the event that the landlord wishes to redevelop, then this agreement is valid but the landlord would still have to serve a notice to quit upon the tenant. If the tenant served a counter notice and applied to the court for a renewal Lease, the landlord would still have to satisfy the court of his intention to redevelop and his need for possession to enable him to do so.