Playing for time with lease expiry

As we seek to return to some level of “normal”, many investors and developers will be reviewing their pre-pandemic projects to see how these fit with their predictions for the property market. For those with upcoming Landlord and Tenant Act 1954 lease expiries, options should be carefully considered, as there may be some helpful flexibility available to accommodate delays in redevelopment plans.

Negotiating and opposing renewal

Where a lease is protected by the 1954 Act, landlords may decide to allow the tenant simply to hold over after the lease expiry until such time as they are in a position to evidence their redevelopment plans – and hope that the tenant does not serve a section 26 request in the meantime. However, current circumstances may present a good opportunity – for tenants also – to negotiate suitable terms now for future flexibility and/or certainty around the end of the existing lease. In some instances, parties have agreed terms for a surrender of the existing lease with provision for Covid-19 arrears to be set off against statutory compensation.

Of course, some tenants will decide that the present market offers them an opportunity to seek better lease terms. Where lease expiry dates allow, this may lead to them serving a request for a new tenancy under section 26 of the 1954 Act. In that event, a landlord has two months in which to serve counter-notice to refuse to grant a new lease. It will then need to satisfy the relevant ground(s) of opposition under the Act in order to terminate the tenancy, such as proving an intention and ability to redevelop the premises under section 30(1)(f).

Break options in renewal leases

For landlords who do not want to be thrust into proving a ground of opposition during the next year or so, and who want to delay redevelopment plans, it may be better not to oppose renewal at present. Instead, they could choose to seek flexibility in the new lease through a redevelopment break option.

Where a tenant refuses to agree to this, the matter will be determined by the court under section 35 of the 1954 Act. This means that the court will consider the terms of the current tenancy and all relevant circumstances when considering whether to include a break option in the renewal lease – see O’May v City of London Real Property Ltd [1982] 261 EG 1185. If the existing lease does not include a break clause, then the landlord will need to persuade the court to insert one – with the backdrop of the courts having confirmed that it is not the policy of the 1954 Act to give security to a tenant at the expense of redevelopment.

Unlike with ground (f), the court will not require any settled intention for imminent redevelopment in order to order a break clause. In judging the terms of any break option, the judge will look to balance the landlord’s desire to redevelop at the appropriate time with the tenant’s need for a reasonable degree of security of tenure. Case law shows how varying these interests can be but there are some helpful illustrations at Court of Appeal level, including:

• Reohorn v Barry Corporation [1956] 167 EG 604: The landlord was still exploring the possibilities of redevelopment and did not satisfy ground (f). However, the court accepted that the land was ripe for redevelopment and therefore included a rolling break option within the new lease, exercisable by either party on six months’ notice.
• Adams v Green [1978] 2 EGLR 46: The Court of Appeal noted the age of the premises and the fact that many of the nearby premises owned by the same landlord had been let with redevelopment break options. It granted a 14-year lease with a landlord’s redevelopment break clause, exercisable on two years’ notice.
• Amika Motors Ltd v Colebrook Holdings Ltd [1981] 2 EGLR 62: Although the tenants sought a long lease because of their business needs, the Court of Appeal held that a five-year lease with a redevelopment break option at the third year was appropriate. Although not a Court of Appeal authority, another helpful illustration of the courts’ approach is shown in National Car Parks Ltd v The Paternoster Consortium Ltd [1990] 1 EGLR 99. In that case, although it was far from certain that the landlord’s redevelopment would take place, the judge was satisfied that there was a real possibility that the obstacles would be overcome and the premises would be required for redevelopment during the course of the tenancy. He therefore ordered the inclusion of a rolling break option, exercisable on six months’ notice. He stated that the test for including a redevelopment break option within a new lease is whether it 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”.

Landlords should obviously be wary that tenants may also seek to include their own break rights, but it is clear from case law that these do not automatically accompany any landlord’s break option and that the O’May test will still be applied.

A balancing act

For those who would prefer to put redevelopment plans “on ice” for a bit while they wait to see what the “new normal” looks like, there are various options available – but it is worth considering carefully how best to arrange any delay in seeking possession.

A version of this article was published in Estates Gazette on 7 September 2021. For more information on the above please contact Emma Humphreys or your ususal Charles Russell Speechlys contact.