Author: Stephanie Trompeter, Senior Associate, Real Estate Dispute Resolution, London
In this post I am writing about the court's approach to a new business tenancy where the parties cannot agree on the terms of a renewal lease with a landlord's break right. The court will need to consider the existing lease and will also need to weigh up allowing the landlord to redevelop the premises and the tenant's security of tenure.
By way of background, a tenant of a business lease has a statutory right to a new lease at the end of the contractual term, if it satisfies certain criteria under the Landlord and Tenant Act 1954 (the 1954 Act). It is open to the parties to agree the terms of the renewal lease but if the parties cannot reach agreement, either the landlord or tenant must apply to court, and the court will determine the terms of the new lease.
The focus of this piece is a scenario in which the tenant's existing lease does not contain a landlord's break clause, but the landlord needs one in the renewal lease so that he has the option to redevelop during the term of the new lease. The question is whether the courts would order a landlord's break clause in these circumstances.
Where the tenant's existing lease does not contain a landlord's break clause, the Court is not obligated to order that its renewal lease contains one. That said, the intention of the 1954 Act is not for the redevelopment of commercial premises to be prevented by the tenant's rights in relation to its new lease. Provided that the landlord can convince a court that there is a real possibility that redevelopment of the premises will occur at some point during the term of the new lease, and there is no major factor pointing to the contrary, case law has held that the court will probably include a redevelopment break clause in the renewal lease or alternatively it will grant a short-term lease to the tenant. The landlord does not have to prove to the court that he will be carrying out the reconstruction works himself, or that the works will take place in the near future – although of course his case will be strengthened if he is able to evidence these points. The stage at which the landlord will need to prove that he has a fixed intention to redevelop will instead be once the renewal lease has been granted and the time comes for the landlord to exercise his break clause. Given that the renewal lease once ordered will be 1954 Act protected too, the landlord will need to go through the statutory termination process prescribed by the 1954 Act as well as triggering the break in the lease itself in order to terminate the lease.
In considering what term should be granted to the tenant, the approach taken by the court is to strike a balance between giving the tenant a reasonable period in which it can remain in the premises with the protection afforded by the 1954 Act and also giving the landlord the ability to reconstruct his commercial property. The result is that landlords often have to wait some time before being able to get their premises back from their 1954 Act protected tenants (though not so long as to stifle their development plans). Thus albeit the landlord may convince the court that a landlord's redevelopment break should be incorporated into a tenant's renewal lease, the court may push back the date from which the break is to operate as part of the balancing exercise.
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