Landlords of leases in England and Wales that are protected by the Landlord and Tenant Act 1954 (1954 Act), can refuse granting their tenant a new lease if they can prove to the requisite standard that they intend to redevelop the property on expiry of the existing lease. But, what if those plans to redevelop are not yet sufficiently certain or too far away to resist the grant of a lease? Or what if a landlord misses the deadline to serve a counter-notice in response to a tenant's s.26 request? Or serves a non-hostile s.25 notice offering the tenant a new tenancy only to later change its mind on redevelopment?
In all of these cases, the landlord will have to grant the tenant a new lease if the tenant wants one. That has the potential to completely scupper redevelopment plans. However, all is not lost. It may be possible for a landlord to insert a redevelopment break option in the new lease.
Redevelopment Break Clause
The well-established test for the inclusion of such a clause is that "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 Paternoster).
This principle was examined in the recent County Court case of B&M Retail Limited v HSBC Bank Pension Trust. In that case, due to an internal post-room error, the landlord, HSBC, had failed to serve a counter-notice to a s.26 request received from its tenant, B&M. HSBC had previously entered into an agreement for lease with a third party, Aldi, pursuant to which Aldi would carry out redevelopment works to the property upon the termination of B&M's lease.
HSBC's evidence was that they would have resisted the grant of a new lease on ground (f) had they been aware of the s.26 request. As they were unable to do that, they instead sought the grant of a new lease either with a rolling six-month redevelopment break exercisable immediately or a lease with a very short term of 18 months.
Planning permission = necessary intention?
HSBC did not have planning permission for their proposal and, in evidence, there was a difference of opinion between planning experts as to whether permission would be obtained for the scheme. Although having planning permission is not standalone evidence of intention, a refusal of planning permission would have defeated the landlord's argument.
Determining "a real possibility"
Pleasingly for landlords, HSBC was successful on the first point. A six-month break notice operable immediately was ordered, despite the fact that this would harm the defendant financially. On this point, the Court said that the policy of the 1954 Act is not to allow the rights of the tenant to stand in the way of redevelopment.
There only needed to be a "real possibility" – not a probability - that planning permission would be obtained. That is a reasonably low bar to clear.
No doubt seeking to draw a balance, the Court granted the tenant a 5 year term – but, given the inclusion of the break clause, that was perhaps of scant consolation to the tenant.
Take Away
The case is a helpful reminder of the situations in which landlords can include redevelopment breaks in dealing with 1954 Act protected leases, and what they can do if they do not protect their position at the initial notice stage. It also illustrates the importance of ensuring that proper processes are in place to monitor incoming post! Even if a redevelopment break is included, the process of having to go to a trial on an unopposed lease renewal and then exercise the development break has the potential to cause serious delay to any redevelopment plans.
If you are a commercial landlord seeking to redevelop involving property with 1954 Act protected leases in place or, you have any concerns or questions about the impact these issues may have on your redevelopment plans or your business, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies contact.
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