Has the law moved too far in favour of tenants on commercial lease renewals?

Published on 03.07.24
Published on 03.07.24

In a recent Landlord and Tenant Act 1954 Act case, the County Court found in favour of Sainsbury’s (the tenant), where the landlord opposed Sainsbury’s application for a new lease on the ground that it wanted to redevelop the premises. The decision raises questions about whether the law has moved too far in favour of tenants and if the 70-year-old Act needs updating. Adam King and Ceri Giordmaina consider the decision in Sainsbury’s Supermarkets Ltd v Medley Assets Ltd.

Background

Sainsbury’s is the tenant of a building on Kentish Town Road, London and has “security of tenure” under the Landlord and Tenant Act 1954 (the Act). This means it has the right to apply to the court for a new lease of the premises when the lease term expires.

The ground floor is used as a Sainsbury’s Local, but the basement and upper floors have been vacant for some time.

The landlord opposed the grant of a new lease relying on ground (f) of section 30 of the Act, namely that it intended to “demolish or reconstruct the premises … and [it] could not reasonably do so without obtaining possession of the holding”.

Sainsbury’s applied to court for a new lease, saying the landlord had not satisfied ground (f) and it was therefore entitled to a new lease.

The landlord’s redevelopment plans

The landlord’s original plan was to convert the upper parts of the building into flats. This plan changed before the hearing, and instead, the landlord proposed lowering the basement and widening the staircase from the ground floor to the upper floors with the eventual aim of redeveloping the upper floors into offices. The landlord had planning permission for the works to the basement and staircase and funding to complete them.

The landlord’s proposed works would not have affected the area Sainsbury’s used, apart from a small storage area on the ground floor.

Sainsbury’s was aware of the landlord’s plans and vacated the storage area a week before the hearing.

Question for the court

The question for the court was whether, for the purposes of ground (f), “the holding” comprised only the part of the premises actually occupied by the tenant (as Sainsbury’s argued) or the entire premises demised by the lease (as the landlord argued).

Decision

The court found in favour of Sainsbury’s, saying “the holding” was the area actually occupied by the tenant for business purposes. Following the vacation of the small storage area by Sainsbury’s, the landlord’s intended works fell outside “the holding” so the landlord could not prove that it needed to obtain possession of the holding to carry out its works.

According to this decision, the area of “actual occupation” is flexible, and a tenant can effectively change its “holding” in response to a landlord’s redevelopment plans to defeat a notice under ground (f). In addition, the fact that Sainsbury’s only vacated the storage area a week before the hearing shows that it does not have to be in “actual occupation” of the holding for a significant period of time.

On renewal, will the tenant’s new lease be of the whole premises or just “the holding”?

The decision led to the question of whether, on renewal of the lease, Sainsbury’s new lease would be of the whole of the building (i.e. as demised by the original lease) or only of “the holding” (i.e. the area actually occupied by it at the date of the hearing).

These cases are normally determined in two stages: firstly, the court will decide, as a preliminary issue, whether or not the landlord has satisfied s30(f) of the Act and is, therefore, entitled to oppose the grant of a new lease. If the landlord is successful, then that is the end of the matter. If, however, the landlord is not successful, the tenant will be entitled to a new lease, and the terms of the new lease will be determined at a subsequent hearing, which is normally many months later.

One might presume that a sensible conclusion would be that the new lease would only be of “the holding” (as at the time of determination of the preliminary issue), and the landlord would be entitled to obtain possession of the rest of the building and carry out its proposed works. Otherwise, a tenant could vacate part of the premises so as to defeat the landlord’s claim for possession and subsequently re-occupy that area and demand a lease of the whole premises.

This is not what the court determined. It said that once the landlord’s ground of opposition had failed, references to “the holding” elsewhere in the Act entitled (and in some cases, required) the tenant to take a new lease of the whole premises demised under the original lease.

In other words, a tenant would be able to vacate part of the premises to defeat a landlord’s opposition under ground (f) but then reoccupy the vacated part and claim a lease of the whole premises.

Landlord’s intention to carry out the works

It should be pointed out that in this case, the judge said the landlord did not have a “genuine and settled intention” to carry out the redevelopment works. In addition, the judge said the proposed works were not substantial works of demolition or construction as required under ground (f). Also, Sainsbury’s could have continued to trade from the store while the works were being carried out.

This confirms that the court will require a landlord to demonstrate a genuine “firm and settled” intention to carry out redevelopment if it seeks to rely on ground (f).

What next?

Every case turns on its own facts, and it may not be practicable for a tenant to rely on the decision in Sainsbury’s to defeat a landlord’s ground (f) notice. Nevertheless, the decision is another example of the court’s recent “tenant-friendly” approach to lease renewals under the Act and creates greater uncertainty for landlords and their legal advisors.

The decision in this case has led to renewed calls for the Act to be modernised, something that has been contemplated for some time. A consultation was announced in 2023, but this was pushed back to “autumn 2024”. With an election looming, it remains to be seen if reform of the Act will be on the new government’s agenda.

If reform is not forthcoming, will we see more attempts by tenants to reject landlords’ claims for repossession on the basis of the Sainsbury’s decision?

In the meantime, both landlords and tenants would be well-advised to seek early legal advice before serving or on receipt of notices under the Act.

If you have any queries about lease renewals or other issues under the Landlord and Tenant Act 1954, please contact Adam King at [email protected] and Ceri Giordmain at [email protected]

Disclaimer: The above is merely general guidance and should not be relied on as formal advice. We suggest you take professional legal advice before taking any action in relation to the issues discussed above.