Indigestion for landlords: a new acid test for redevelopment under ground (f)

In October, we wrote about the Supreme Court case S. Franses Ltd v The Cavendish Hotel (London) Limited [2018] UKSC 62, concerning a landlord’s ability to oppose a lease renewal under the Landlord and Tenant Act 1954 (the “Act”) using ground (f) (redevelopment). Yesterday, the Supreme Court handed down judgment in favour of the appellant tenant. On face-value, the implications of this case seem to be tenant-friendly; however, here we discuss further the commercial implications of the ruling for both landlords and tenants.

Background

The facts of the case are set out in our previous blog. This appeal concerned the qualified security of tenure enjoyed by business tenants, pursuant to the Act. A tenant in business occupation of premises under a tenancy may request a new tenancy at the contractual expiry date of its existing tenancy. A landlord may contest the grant of that new tenancy, citing one or more grounds of opposition laid out in the Act. If a landlord's ground of opposition is successfully made out, the tenant is not granted a new tenancy when its existing one terminates. The ground for opposition relevant to this appeal was ground (f), this being that the landlord intends to demolish or reconstruct the premises and could not reasonably do so without obtaining possession of the premises.  In this case, the key question considered by the Supreme Court was whether the landlord could successfully invoke ground (f) to oppose the grant of a new tenancy if the works intended to be carried out had no purpose other than to evict the tenant, and would not be undertaken if the tenant left voluntarily (rather than took the matter through to a trial). Put another way, was the landlord's conditional intention sufficient to satisfy ground (f) of the Act?

Judgment

The Supreme Court disagreed with the lower courts, holding that the landlord's intention to carry out works cannot be conditional on whether the tenant chooses to assert its claim to a new tenancy and to persist in that claim. The acid test is whether the landlord would intend to do the same works if the tenant left voluntarily.  In this case, the landlord only intended to carry out a particular scheme of works to get rid of the tenant, and it would not derive any benefit from the reconstruction itself. Accordingly, the Supreme Court unanimously allowed the appeal, deciding that ground (f) could not be invoked.

The Supreme Court maintained the status quo in relation to motive: a landlord's intention remains key and motive irrelevant in deciding whether ground (f) has been met. However, just as a landlord's motive may be investigated at trial as evidence for the genuineness of a landlord's professed intention to carry out the works, now motive may be relevant as evidence of the conditional character of the landlord's intention.

Commercial implications

At least on face-value, the implications of this case are tenant-friendly. A court will be more critical of a proposed scheme of works put forward by a landlord for the purposes of ground (f). If the works lack utility, the courts may well be more likely to conclude as a matter of evidence that the landlord's intention is merely conditional.

It will be more difficult, uncertain and costly for landlords to establish ground (f) as the new conditionality rule applies to each element of the proposed works separately, and the proposed scheme as a whole.

Let's say, for example, a landlord has put together a scheme of works to redevelop premises let to a 1954 Act-protected tenant. The landlord intends to carry out some of the proposed works whether or not these are necessary to get vacant possession of the premises ("unconditional works").  However, additional works have been bolted onto the scheme to protect against the risk that the landlord's unconditional works would be deemed insufficiently substantial or disruptive to warrant the refusal of a new tenancy pursuant to ground (f) of the Act. These works are largely – but not wholly - of no practical benefit. If it were established at the date of trial that, were the tenant to leave voluntarily, the landlord would not be carrying out the additional works, then the court would have no option but to consider the unconditional works alone.  The original works may or may not be sufficient to satisfy ground (f). The practical benefit of the additional works would then come under scrutiny.

If a landlord wants to get rid of a tenant, it can still design a scheme that is otherwise pointless (ie that achieves no purpose other than to achieve vacant possession) – but it will only be able to surmount the new "conditionality" hurdle by demonstrating to the court an intention to carry out these works whether or not the tenant leaves the premises. Previously, landlords often were "off the hook" if their tenant left voluntarily - hence the decision today will have practical and financial consequences for landlords.

Landlords will be mindful of the need to be more cautious when contemplating and designing redevelopment schemes.  A smart tenant is likely to ask the court to order the disclosure of all documents relevant to the question of the landlord's intention. A tenant may argue that it is entitled to inspect internal emails, board minutes and so forth, to decide for itself whether the landlord's intention to redevelop the premises is in any way conditional on the tenant leaving the premises. Landlords may well not want to give this information and may decide instead to settle out of court on terms that are more favourable to tenants, or they may choose instead to start granting leases outside the 1954 Act, so as to have a clearer right to possession, and at the same time have to take a hit on achievable rents.

All of the above means that the protection proffered to tenants by the Act has been maintained, and their bargaining position upon a lease renewal has been improved. These are definite "wins" for tenants. However, the knock-on effects for tenants are not so favourable.  Landlords may be less willing to agree to new tenancies being granted within the Act or they may demand higher rents.  Landlords may prefer not to grant protected tenancies at all, and instead take a hit on achievable rents in return for automatic rights to terminate."

Author: Stephanie Trompeter, Senior Associate, Real Estate Disputes, London

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