Modernising Business Tenancies: Should the redevelopment ground be altered?

The Law Commission’s initial consultation on the models for renewal of business tenancies under the Landlord and Tenant Act 1954 (the “LTA 1954”) has now closed.  For more details as to the phase 1 consultation (the “Initial Consultation”), please see our Insight: Modernising Business Tenancies – the end of security of tenure? This is the second in our series of Insights examining points that appear likely to be considered once the model for renewal of tenancies has been settled following the Initial Consultation.    

LTA 1954 section 30(1)(f) (the “Development Ground”)

Both landlords and tenants face difficulties under the existing LTA 1954 section 30(1)(f) when considering termination of tenancies for the purpose of development. The provision requires that ‘… … on the termination of the current tenancy the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises or to carry out substantial work of construction on the holding or part thereof that he could not reasonably do so without obtaining possession of the holding’.

The Development Ground is the most frequently used ground in Part II of the LTA 1954 by landlords wishing to terminate protected business tenancies. To obtain possession for the works if the tenant objects and the lease does not contain a right to enter and carry out the intended works, the court must decide whether:

• The works will satisfy the requirements of the Development Ground.
• The landlord has a firm and settled intention to proceed with the works.
• The landlord has a reasonable prospect of achieving that intention.

There have been complaints from landlords and tenants about:

• The difficulty in assessing whether proposed plans will meet the requirements of the Development Ground;
• The protracted court process that can delay redevelopment and a tenant’s search for alternative premises;
• There being no consideration of the respective positions of and prejudice to the landlord and the tenant in the context of the size and significance of the development;
• The need to identify the details of the development far in advance of it taking place; and
• Compensation payments not reflecting the costs and losses to the tenant.

The decisions of the courts on the Development Ground continue to affect landlords’ and tenants’ approaches to development and to claims for possession based on the Development Ground. Two recent examples which have forced landlords and tenants to change their approach have been: 

• The Supreme Court decision in S Franses Ltd v The Cavendish Hotel (London) Ltd [2018] UKSC 62,  which resulted in landlords needing to establish that they intend to redevelop whether or not the tenant vacates the premises; and 
• The County Court at Central London’s decision in Sainsbury’s Supermarkets Ltd v Medley Assets Ltd (unreported) 21 March 2024 (County Court). This confirmed that the holding in a Development Ground claim means the premises occupied by the tenant at the date of the hearing. In this claim, Sainsbury’s reduced the area they occupied thereby making it possible for them to remain in occupation of the holding during the redevelopment and defeating their landlord’s claim for termination of the tenancy.

Criticisms of existing position – Current problems for occupiers and developers?

Criticisms of the existing position include:

Uncertainty of outcome

While there is a lot of authority on the tests under the Development Ground, the outcome of claims is fact specific. In some situations, a court will agree to the grant of a new lease with a break clause to enable the landlord to determine it if it can establish the Development Ground at a later date. The court may also determine that the Development Ground would have been satisfied within a 12-month period from the date of termination specified in a section 25 notice or section 26 request for a new tenancy. If this occurs, a new lease will not be granted and the landlord’s ability to take possession and develop may be set back by up to 12 months.  A 12-month extension may not satisfy a tenant who is likely to start looking for new premises immediately. 

Timing

If the dispute goes through the court process and reaches trial, it is likely the parties will be waiting 18 months or more before the outcome is determined. This can significantly delay development and result in both landlords and tenants wasting time and money in considering different development options and seeking new premises.

Finding alternative premises

If a tenant does not consider alternative premises while the litigation is ongoing, there is a risk that they will find themselves with less than 4 months to find alternative premises.

Effect on planning and funding

The uncertainty of the outcome of a claim under the Development Ground may delay landlords from applying for planning permission, may force them to apply for a variation or make a new application for permission and may require them to revise their funding arrangements. This creates a brake on the progress of developments landlord.

Litigation

There are significant cost and time implications for both parties to consider if they apply to the court to resolve this issue, and litigation risk for both parties (see uncertainty of outcome above).

Registration gap

A person seeking to apply to court for possession of premises on the Development Ground needs to have a legal title to the premises or be able to involve the legal owner as a party to the claim. This can be a particular problem if the identity of the legal owner changes after service of a section 25 notice or commencement of a claim, as a result of a sale of a property. A purchaser with a view to development may face difficulty in bring a claim under the Development Ground except with the previous landlord’s cooperation since registration and transfer of the legal interest could take many months depending on its complexity due to current delays at the Land Registry.

Compensation

The amount of compensation a tenant may receive if a landlord is successful in taking possession under the Development Ground is one or two times the rateable value of the premises depending on how long the tenant or a predecessor in its business has occupied these. There has been criticism that this does not reflect the actual loss and inconvenience a tenant may suffer on being required to vacate the.

Retrofit versus redevelopment

The requirements of the Development Ground do not fit neatly with the changing approach to redevelopment to encompass a reduction in carbon emissions and promote retrofitting of properties. M&S’s flagship Oxford Street store was the subject of much media coverage during 2023 and 2024 when its plans to redevelop and modernise its store were initially rejected before the new Secretary of State granted consent to the development in December 2024. Where less intrusive and sequenced retrofit works are the preferred option, there may be situations when a landlord does not need possession of the holding to carry out those works and will not be able to establish the Development Ground.

The Future

Despite the above criticisms, the Development Ground remains the most popular ground on which to terminate business tenancies. It would need a radical alteration to address the concerns of landowners, tenants and the changing market. It is to be hoped that this is an area of concentration for the further consultation.

We have previously commented on potential reforms to the court system for unopposed lease renewals, in our Insight: Modernising Business Tenancies: Where and how should disputes be heard?. The First-Tier Tribunal (Property Chamber) (“FTT”) may be the tribunal best suited to considering opposed, lease renewal claims, in particular under the Development Ground. The pending increase in amount of claims the FTT will have to consider following reforms to statute relating to residential tenancies may mean this is not practical. Opposed lease renewals may remain within the courts. Given landlords and tenants concerns about the length of time these take to conclude, a pre-action protocol and accelerated procedures may be needed. It would improve the situation if a specialist tribunal existed. As public funding is unlikely to be available for this, perhaps a specialist, opposed lease renewal arbitration service might be an answer.        

Land Registry delays are widely known about so provisions are increasingly being made between parties to agree contractual terms which enable an incoming buyer to serve notices in the seller’s name, with their consent and commence termination of leases under the LTA 1954.

It will be interesting to see the extent to which the Law Commission considers the Development Ground in the further phase consultation.

This insight does not constitute legal advice. If any advice is needed as to the specific circumstances of your case, please contact Andrew Ross, Matt Cordwent or your usual Charles Russell Speechlys’ contact.