Security of Tenure and Options to Renew: Can tenants have their cake and eat it?

In a decision with significant implications for commercial landlords and tenants alike, the Court of Appeal has provided clarification on the interaction between contractual renewal options and statutory security of tenure under the Landlord and Tenant Act 1954 (1954 Act).

In Caterpillar Property Ltd and Anor v Park Cakes Ltd [2026] EWCA Civ 575, the Court of Appeal confirmed that the mere existence of a tenant’s option to renew a lease does not exclude statutory renewal rights under the 1954 Act.

This was an expedited leapfrog appeal by the landlord against a County Court decision that the tenant was entitled to the protection of the 1954 Act, despite the existence of an unexercised option to renew.

Background

Park Cakes Ltd, the company behind the well-known “Colin the Caterpillar” cake, occupied two factory premises under 20-year leases granted in 2007. The leases had identical terms, and each included a tenant-only option to renew for a further 10-year term, exercisable subject to certain conditions.

Under the renewal option, the rent was to be determined by a fixed formula which would result in a rent higher than the open market rent. Understandably, the tenant sought to exercise its right to request a new tenancy under Pt II of the 1954 Act, instead of exercising the renewal option, since a statutory renewal would result in a market rent assessment.

The landlords argued that the existence of the contractual renewal option meant that section 28 of the 1954 Act applied, thereby excluding statutory protection altogether.

Section 28 provides that where the landlord and tenant have agreed the grant of a new tenancy, the current tenancy will fall outside of the protection of the 1954 Act. As such, the issue for the court was whether a tenant’s option to renew amounts to an “agreement” for the grant of a future tenancy within the meaning of section 28.

The landlords argued that the option to renew amounted to such an agreement, meaning the tenant’s route to a future lease was exercising the option. The tenant contended that an unexercised option is not a binding agreement, therefore does not trigger section 28 and the tenant retained the ability to rely on the 1954 Act unless and until the option is exercised.

Decision

The Court of Appeal dismissed the landlords’ appeal and upheld the tenant’s right to 1954 Act protection.

It was held that section 28 requires a binding, mutually enforceable commitment by both landlord and tenant. This means that an unexercised renewal option is not a binding agreement for a new tenancy. Instead, an option gives the tenant a right, but not an obligation, to renew, and the landlord’s obligation remains conditional until it is validly exercised. There is no mutual commitment until that point, as required by section 28. An option was helpfully characterised as a unilateral or “if” contract which only becomes a bilateral contract once the option is exercised.

The court highlighted that options can be commercially fragile, often subject to strict conditions, which failure to comply with may invalidate the option entirely. This means that, in practice, a tenant’s position under an option can be significantly more precarious than under the 1954 Act, where a landlord must satisfy one of the statutory grounds of opposition to refuse renewal.

Our thinking

Contracting out remains the only reliable route for excluding statutory protection. Landlords should not assume that the inclusion of a renewal option in a commercial lease will displace the 1954 Act protection afforded to tenants. If the intention is to avoid security of tenure, landlords must ensure that the statutory contracting-out procedure, under section 38A of the Act, is properly followed. Otherwise, tenants may be able to have their cake and eat it!

The decision may prompt landlords to review existing leases to understand whether renewal options coexist with statutory protection, as this may affect future asset management or redevelopment strategies. Tenants, on the other hand, should be considering whether exercising a renewal option is commercially preferable to relying on statutory renewal rights where both are available.

How we can help

If you have leases with renewal options and are uncertain about how the 1954 Act applies to your specific circumstances, please get in touch with our property disputes team.