Business Tenants Stronger Right to Renew Lease

Are you planning to purchase a commercial property that already has a tenant? Is the plan to let it out for better rates or occupy it yourself? Or perhaps you are looking to redevelop the building? Have you been advised how you can require the tenant to leave when their lease ends, despite it being a protected tenancy? If the answer to any of these questions is yes, then you need to factor a new UK Supreme Court judgement into your plans.

Many commercial tenants have the benefit of a protected tenancy under the Landlord and Tenant Act 1954. This grants a tenant an automatic right to renew their lease at the end of the lease term on terms decided by the court, if the parties are unable to come to an agreement. A landlord may still be able to obtain vacant possession of the property, notwithstanding the tenant’s statutory rights, but do so they will first need to prove one of the seven grounds set out in the 1954 Act. In summary the grounds are:

  1. The landlord has already owned the property for five years and intends to run their own business from the property or live there.
  2. The tenant’s landlord is not the owner, and has sub-let part of it to the tenant, but now plans to sub-let the whole property.
  3. The landlord offers reasonable alternative accommodation suitable for the tenant’s requirements, including the need to preserve their business’s goodwill value.
  4. The tenant has been repeatedly late in paying rent.
  5. The tenant has failed to repair and maintain the property up to the standard of their contractual commitments.
  6. The tenant has committed unlawful conduct or other substantial breaches of their lease.
  7. The landlord intends to reconstruct or demolish the property, and the works could not be carried out without the tenant leaving.

As an aside, if the landlord is looking to rely on grounds 1, 2 and 7 above then they are obliged to pay compensation to the tenant. The sums can be significant and amongst other things, will depend on the period of time that the tenant has been in occupation.

The new Supreme Court decision is relevant to landlords looking to obtain vacant possession by proving the seventh ground — the development ground.

Until this new judgment, landlords could present to the court planned works the sole purpose of which was to be sufficient to prove the development ground. In other words, the works added no value to the property and were pointless, save they allowed the landlord to maintain in court that the tenant had to vacate as the landlord would otherwise be unable to carry out those works.

The law has now effectively changed given the December 2018 final judgment in S Franses Ltd v The Cavendish Hotel (London) Ltd. The landlord proposed pointless construction works. They were open about only intending to carry out the works, if necessary to get rid of the tenant. When the High Court looked at this case they ruled in favour of the landlord, as required by precedent rulings. The Supreme Court decided to overrule and thus strengthened the tenant’s right to renew.

Going forward, the landlord has to convince the court that they would plan to carry out the same work even if the tenant chose to leave. The landlord’s intention to carry out the work can’t be conditional on whether the tenant tries to get a new tenancy. This intention can be inferred from the redevelopment plans themselves. Judges will ask whether such works would make financial sense if the tenant was choosing to leave anyway.

A redevelopment of a property you plan to re-let, can of course make business sense. The plan can make the property suitable for sale or re letting to a different type of tenant who would pay a higher rent, and the increased rental or sale value has to justify the cost of the construction.

To use construction plans as grounds to prevent a tenant renewing, will now require plans that would be sensible even if the tenant leaves voluntarily. Well-advised tenants now have greater reason to seek disclosure and examine such plans.

If you’re purchasing a commercial property with a protected tenant, there may still be options to gain vacant possession. But those who ignore this new ruling, may find themselves suiting up for court.

By: David Prais and Jonathan Perrin

Please contact David Prais of Asserson if you wish to discuss this case further or if you need some other legal advice.

Click here to download a PDF of the original article as it appears in the 18 Feb 2019 issue of Hamodia.

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