Redevelopment Intentions and Redevelopment Breaks

1.????Landlords sometimes fail to appreciate quite how demanding it can be having to prove an intention to redevelop, for the purposes of resisting the grant of a new business tenancy under the redevelopment ground in Part II of the Landlord and Tenant Act 1954 (“the 1954 Act”), or obtaining an order that a code agreement comes to an end under the similar though not identical ground in the new Electronic Communications Code introduced in the Digital Economy Act 2017 (“the New Code”). ?

2.????As is well known, as well as needing to have a substantial enough project in mind for the intended works to satisfy the relevant requirements, the landlord also needs to have both the objective and subjective elements of the intention to implement those works.?Further, as explained by the Supreme Court in S Frances Ltd v Cavendish Hotel (London) Ltd [2018] UKSC 62, that intention must not be conditional, in the sense that the landlord would only carry it out if that were necessary to get the tenant out, and would not do so if the tenant vacated voluntarily.?

3.????The burden is on the landlord to establish its intention, as a matter of fact, although it is only a rare case which should be decided on the burden of proof (see Macey v Pizza Express (Restaurants) Ltd [2021] EWHC 2847 (Ch) para. 28).?The Macey case is an interesting recent example of a first instance decision that a landlord did not have the relevant intention being reviewed and upheld in the High Court.?The first instance judge was unpersuaded of the genuineness of the landlord’s intention, and the appellate court was not prepared to interfere with that finding of fact.?Of course, in Gulf Agencies Ltd v Ahmed [2016] EWCA Civ 44 the first instance judge’s failure to give clear reasons for not believing what the landlord said meant there would have to be a new trial.?However, provided the first instance judge gives clear reasons, it is difficult to attack such a decision on appeal.?

4.????GT Motoring Solutions Ltd v Williams [2023] 1 WLUK 231 is a recent first instance decision which illustrates some of the pitfalls for landlords, including the following:

·?????A subjective desire to redevelop in some way or other will not be enough if no decision has been made how to achieve redevelopment, in particular if plans keep changing, because in those circumstances there will be no firm and settled intention to redevelop.?Matters will not have moved “out of the zone of contemplation and into the valley of decision”.?

·?????At the early stages of planning a redevelopment project, the landlord may struggle to satisfy the requirements for having an objective intention, because there is too much left to do, and too much uncertainty, particularly if the landlord does not produce expert evidence of a realistic prospect of planning permission for a determinate project being granted.?Such objective problems may also influence the Court’s views of the genuineness of the subjective intention.?

·?????Evidence of available finance for the project is a vital element of what is required to demonstrate the objective element of the intention.?

·?????The requirement that the intention must be to implement the planned works “on the termination of the current tenancy” intensifies these difficulties, as although this does not mean “immediately”, it does mean that any uncertainties will need to be realistically capable of resolution within fairly short order after that date, most likely within a period of a few months or so.??

·?????If the landlord’s evidence is of an intention to demolish and then redevelop, it may well not work to try to retreat at trial to a mere intention to demolish, particularly where planning permission for demolition would not be forthcoming without permission for redevelopment.?

5.????For these and similar reasons, it is sometimes necessary to explain to landlords who are confident that they intend to redevelop soon, in one or other manner, which they are in the process of deciding upon, that they may not succeed on a preliminary issue regarding that intention.?In those circumstances, it will be very important that an appropriate redevelopment break is sought in the new lease.?Another circumstance in which that a break will need to be sought is when, by an oversight, the landlord has lost the right to oppose the grant of a new tenancy.?

6.????That is what happened in B & M Retail Limited v HSBC Bank Pension Trust (UK) Limited, County Court at Central London (3rd March 2023).?Having failed to notice the tenant’s s. 26 notice, the landlord had not given a counternotice opposing the grant of a new tenancy, and so lost the right to do so.?The landlord wished to carry out substantial works to the premises, through a new tenant, Aldi, under an agreement for lease, and so sought a redevelopment break operable immediately upon grant, on 6 months’ notice, and also (as a fall-back position) sought a short term, of only 18 months.?This case is a useful summary of the relevant principles which emerge from the caselaw, and an interesting example of their application on the facts of a particular case.?

7.????The Judge pointed out that although the conventional approach was to deal with the length of the term under s. 33 of the 1954 Act first, and then to consider the other terms, including the proposed break option, next, under s. 35 of the Act, it made more sense to address the question of the break option first, as that would determine the significance of the length of the term to the landlord.?

8.????The tenant resisted the redevelopment break on the basis that the tenant’s security of tenure was of paramount importance.?The Judge decided that this was wrong.?It was contrary to the principle that the 1954 Act should not be invoked by a tenant to prevent development.?The judge cited the important passages from Reohorn v Barry [1956] 2 All ER that the 1954 Act “should clearly not be used as an instrument to defeat development”, and Adams v Green [1978] 2 ELGR 46 it was no part of the policy of the 1954 Act “to give security of tenure to a business tenant at the expense of preventing redevelopment”. ?The judge rejected the relevance of the authorities cited by the tenant, in which a break option was not ordered, or when the operation of a break option was delayed, on the basis that they were decided on their own facts.?

9.????The test to be applied is whether there is a “real possibility (as opposed to a probability) that the premises in question will be required for reconstruction during the continuance of the proposed new tenancy” (National Car Parks Limited v The Paternoster Consortium Ltd [1990] 1 EGLR 99).?If there is, then a break option should be included.?As to whether the operation of the break option should be delayed, the judge concluded that:

“… the weight of authority demonstrates that a landlord should not be prevented from pursuing its redevelopment plan albeit that there are circumstances where a court can conclude that it would be reasonable in all the circumstances to delay the operation of a break clause drafted for this purpose.”

10.?There was no serious challenge on the facts to the landlord’s subjective intention to undertake the works, but the tenant relied on expert evidence that it was unlikely that planning permission would be obtained.?The judge preferred the expert evidence of the landlord that the “real possibility” test established in Paternoster was satisfied, and decided that there should be a break clause in the new lease.?

11.?He then went on to consider when it should be exercisable.?The tenant argued that it should not be exercisable until the fifth anniversary of the new lease.?Again, the judge preferred the argument of the landlord that the break should be operable immediately, emphasising the importance of not preventing development, despite the harsh effect that the exercise of the break might have on the tenant.?He placed particular reliance on the point made by Stamp LJ in the Adams case that:

“If the tenant’s submission that the property will not be ripe for redevelopment within the next 7 years is well founded, he will not be disturbed by the existence of the break clause during the continuance of his 7-year tenancy, because the right to break will, of course, not be exercisable.”

12.?This well illustrates the problem facing tenants resisting landlord’s redevelopment breaks by playing down the likelihood of redevelopment.?The less likely it is, the less threat the inclusion of a break option presents to the tenant.?

13.?Given the decision on the break option, the importance to the landlord of a short term was greatly reduced, and the judge decided that a term of 5 years was reasonable in all the circumstances.?

14.?For the landlord, securing a break option in principle is not the end of the matter.?Its precise wording will also be important.?An option which is only exercisable if the landlord intends redevelopment may well be construed as requiring that the landlord can satisfy the intention tests both at the date it serves the notice, and at the date of the eventual ground (f) preliminary issue.?That is likely to make it very hard to exercise the break.?So the break option should avoid replicating the ground (f) requirement for an intention.?Ideally it should only require the landlord to have the wish, or desire, to redevelop (Aberdeen Steak Houses Group Plc v Crown Estate Commissioners [1997] 2 E.G.L.R. 107).?The tenant will still have the protection of the requirement on the landlord to establish its genuine, non-conditional, intention to do the works as at the date of the hearing.?

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Greville Healey

Falcon Chambers