No room for development …

12 December, 2018

S Franses Ltd (Appellant) v The Cavendish Hotel (London) Ltd (Respondent)

Background

The Landlord and Tenant Act 1954 gives commercial tenants security of tenure (unless the parties have expressly ‘contracted out’ of those statutory protections).  At the end of a contractual term of a commercial lease, the tenancy will be continued, indefinitely, by Section 24 of the Act.

Under Section 26 of the Act, a statutorily ‘protected’ tenant may ask its landlord to grant it a new lease.  In most cases, the tenant’s request is accepted and the parties will go on to negotiate terms for the new lease.

But the landlord has the option of rejecting the tenant’s request.  If it does, it will need to rely on one of the grounds of opposition set out in Section 30 of the Act.  The condition mentioned in Section 30(1)(f) or “Ground (f)” is the most common of them.  It has two key requirements.  The landlord must (a) intend to redevelop the premises in (b) such a way that would be impossible with the tenant still in situ.

The best laid plans

This case concerned a dispute over the right to possession of the ground floor and basement of premises at 80 Jermyn Street in London.  They are occupied by the tenant, S Franses Limited, under the terms of a tenancy with the protection of the Act.  It uses them as an art gallery and showroom.  The rest of the building is used by the landlord as The Cavendish Hotel.

The tenant served a Section 26 request on the landlord, requesting the grant of a new tenancy.  The landlord rejected it, relying on Ground (f).  The tenant then issued proceedings in the Central London County Court, seeking a new lease.  The preliminary issue for the Court to decide was whether the landlord’s ground of opposition on Ground (f) could succeed.

The landlord’s redevelopment proposal involved the creation of two new retail units in the premises.  The plans involved extensive internal renovations, much of which was of no practical benefit.  During cross-examination, the landlord’s witness made a candid admission.  She acknowledged that the sole purpose of the third scheme was to satisfy the condition of Ground (f).  In other words, the landlord would only redevelop the premises if that were necessary in order to get rid of the tenant!

But despite this, the Court found for the landlord.  It was enough that it had the requisite firm and settled intention to redevelop the subject premises at the time of the hearing.  Its purpose/motive in doing so was not relevant.  On appeal to the High Court, Mr Justice Jay took the same view.  But he did give permission for a leap-frog appeal to the Supreme Court.

Failing the acid test

Giving the leading judgment of the Supreme Court, Lord Sumption accepted that the landlord may have been settled in its intention to redevelop by the date of the first hearing.  But he took the analysis a step further, linking the specific nature of the landlord’s intention to the wording of the Act itself.

He found that there is an underlying assumption behind Ground (f).  The proposed redevelopment of the premises must be obstructed by the tenant’s continuing occupation of them.  That means the landlord’s intention to redevelop must exist separately from the tenant’s claim for a new lease.  It cannot be conditional on it.  Lord Sumption summarised this requirement into what he called the ‘acid test’: would the landlord still redevelop the premises if the tenant were to leave voluntarily?

Of course, the landlord had already given the wrong answer to that question.  In the lower courts, it had admitted that it would not carry out the development were the tenant to leave of its own accord.  It followed that the requirements of Ground (f) had not been met and the tenant’s appeal would be allowed.

Conclusions

  • Any landlord planning to contest a tenant’s application for a new lease under Ground (f) will still have to ensure that (a) they have a firm and settled intention to carry out their proposed development by the time of any court hearing.  But they must also (b) pass the ‘acid test’ and be able to demonstrate that they would act in the same way even if the tenant were to vacate the premises voluntarily.
  • The court is now likely to be even more rigorous in its assessment of Ground (f) redevelopment schemes.  This will make it all the more important for landlords to adopt a cautious and well informed approach, right from the beginning of the process.

If you would like specific advice on how the issues in this case may affect property that you own, or lease, then please click on the links below for details of our Property Dispute Resolution Team who will be happy to help.

https://www.cripps.co.uk/business/property-dispute-resolution/

https://www.pglaw.co.uk/expertise/real-estate-2/dispute-resolution/