Landlord gets second chance after missing crucial date in lease renewal proceedings

The Landlord & Tenant Act 1954 (the “Act”) was intended to give tenants security of tenure to carry on their businesses without the disruption of relocation and the attendant risk of loss of goodwill. However, the interests of the landlord in maximising the value of its own premises were also considered in the Act, with provision that a landlord may recover possession if (amongst other grounds) it can prove the intention to redevelop the premises. A recent High Court decision has provided an interesting (and from a landlord’s perspective, welcome) steer on the weight the court gives to a landlord’s future right to redevelop.

For landlords who do not have the requisite level of settled intention to develop when the contested lease application is heard, but want to preserve the ability to do so do in the near future, the alternative to opposing the grant of a new lease is to have a landlord’s break clause inserted into the new lease by the court. This is something a tenant will almost certainly resist, because its security of tenure under the Act is jeopardised.

In the case of B&M Retail Limited v HSBC Bank Pension Trust (UK) Limited, the tenant appealed against a county court judge’s grant of a renewal lease with a six-month break clause for the landlord exercisable from the very start of the new lease. This effectively meant that the landlord could serve a notice immediately after the grant of the lease, so B&M would have to cease trading from its Willesden site by spring 2024, although it would still be able to oppose the landlord’s notice on the usual grounds, through the statutory procedure.
The High Court rejected B&M’s appeal against the inclusion of a break clause. The Act gives the court a wide discretion to determine new lease terms directing it “to have regard to the terms of the current tenancy and to all relevant circumstances.” Whilst B&M may feel disappointed at its imminent departure from the site, it may be felt that to decide otherwise would have been to allow the retailer to take unfair advantage of the Covid-related windfall we describe below.

B&M had occupied the eighties-built store since 2000. It had correctly served the requisite notice to request a new tenancy from the landlord, but the notice had arrived during the disruptive times of the first COVID-19 lockdown and had not reached the responsible person. In the meantime, and in anticipation of the end of the lease, the landlord had entered into a very advantageous agreement for lease (“AfL”) with supermarket operator Aldi. Under the AfL, Aldi had committed to demolishing the ‘tired’ store and constructing a bigger store, with the concomitant increase in rent. The AfL was conditional on the landlord obtaining planning permission and vacant possession. and had a long-stop date in 2025, although it was likely that Aldi would choose to extend this.

The existence of the tenant’s notice only came to the landlord’s attention when it served its own notice under the Act purporting to terminate the lease and opposing the grant of a new lease. At trial, the tenant argued for a ten-year lease with no break clause, but if the judge were to decide against it on that point, it argued for a landlord’s five-year break. In contrast, the landlord wanted a lease term of eighteen months with a break clause of six months operable immediately.

The judge in dismissing B&M’s appeal made reference to a long line of case law where it had repeatedly been held that the underlying policy of the Act was not to fetter or restrict a landlord’s ability to redevelop its asset. Nevertheless, there was a balancing exercise to be performed, between the tenant’s desire for security to conduct its business and the landlord’s economic interests. Miles J then went on to discuss the width of judicial discretion and how it might be exercised differently by different tribunals without giving a legitimate ground for criticism.

Landlords with tenants holding leases inside the Act will be glad to see this robust and commercial decision approved on appeal. The Act is currently the subject of scrutiny by the Law Commission, as it has consistently attracted criticism for being an anomaly in an economic landscape much altered from the war-wearied days of the 1950’s when landlords were perceived as being too powerful.

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