Q&A: Where do the boundaries lie?

Georgina Redsell and David Nicholls (Landmark Chambers) answer a query on building leases and intention to redevelop post-Franses.

Question

I am a landlord of commercial premises, which are let on a tenancy protected by Part II of the Landlord and Tenant Act 1954. The contractual term will shortly end and I want to oppose renewal on the ground of redevelopment, with a view to selling the property to a developer after obtaining vacant possession. However, I have been advised this may be problematic if the tenant refuses to leave and I am considering granting a building lease instead. Will the Supreme Court’s decision in Franses Ltd v Cavendish Hotel (London) Ltd [2018] UKSC 62; [2019] EGLR 4 affect my ability to obtain vacant possession if I enter into a building lease simply for the purpose of satisfying ground (f)?

Answer

Although the practical consequences of Franses are yet to be worked out by the courts, as long as your intention to redevelop can be demonstrated both subjectively and objectively by the date of the hearing, then it is unlikely that your tenant will have grounds for challenge. You should ensure that you have entered into an agreement for a building lease by the date of the hearing.

Explanation

In order to satisfy ground (f), the proposed redevelopment has to be carried out by the landlord, which is why it is not enough to intend to sell to a developer on obtaining vacant possession. A building lease therefore provides a means by which a landlord may satisfy ground (f) of section 30(1) of the Landlord and Tenant Act 1954 (the 1954 Act) and redevelop his premises. Whereas under an ordinary building contract, the redevelopment works are done by contractors on behalf of the landlord usually in return for remuneration; under a building lease the contractors do the works in exchange for the grant of the lease.

To establish your “intention” under ground (f) you must prove that you intend – objectively and subjectively – to carry out the redevelopment at the date of the hearing. The subjective intention must be genuine as well as sufficiently firm and settled. Franses has confirmed that it must also be unconditional so that the landlord must intend to carry out the same works even if the tenant left voluntarily.

It is well established that a landlord’s subjective intention to do the works can be satisfied where the works are to be done by a third party, such as a building contractor or a new tenant under a building lease.

However the works are done, the most important criterion is that the landlord retains control: eg the landlord should have control of which works are going to be done and how. This can be ensured through appropriate obligations in the building lease. Provided the landlord retains control, it does not matter that the plans for the redevelopment come from the prospective tenant or developer rather than the landlord and building leases are therefore a recognised means by which a landlord can establish the requisite intention under ground (f).

That said, it is important to note that a very short building lease may cast doubt on the genuineness of the landlord’s intention, perhaps because the term is insufficient for the works to be done or because the value of the lease granted is insufficiently remunerative. But in Turner v Wandsworth LBC [1994] 1 EGLR 134 a four-year term was held to be sufficiently long.

A new test

The facts in Franses were extreme: the landlord put forward a scheme of works solely as a means of obtaining possession. The works ran the risk of the tenant’s premises becoming unusable and they would not have been undertaken if the tenant voluntarily vacated. The Supreme Court ruled that a landlord’s intention to redevelop must exist independently of the tenant’s statutory claim to a new tenancy, finding for the tenant because the landlord’s intention was conditional on whether the tenant chose to assert its claim to a new tenancy. A new test has been introduced: would the landlord do the same works if the tenant left voluntarily?

Applying this test to your situation, it is necessary to consider whether using the medium of a building lease could be considered a contrivance to secure possession artificially. Unless it could be demonstrated that the building lease was a sham, it seems unlikely that a tenant could successfully argue that your intention is not genuine.

Furthermore, the date at which you establish your intention is the date of the hearing so it does not matter that you may have considered other options (such as a sale) in the past. In fact, this is precisely what happened in Spook Erection Ltd v British Railways Board [1988] 1 EGLR 76. The landlord originally intended to sell to a supermarket chain but, when it became clear that the tenant would not vacate, the landlord entered into a building lease.

Important distinction

Moreover, there is an important distinction between deliberately seeking to avoid the 1954 Act’s protection by manufacturing a contrived set of works and acknowledging the 1954 Act’s existence by entering into a building lease.

In Santander UK plc v LPC Estates Ltd [2018] EWHC 2193 (Ch) – decided before Franses – a tenant made an unsuccessful application for permission to appeal from a decision granting a termination order by trying to argue that the landlord’s intention to grant a building lease was a deliberate attempt to defeat the Act. Given that building leases have been accepted as a means whereby a landlord can demonstrate the intention to redevelop since the 1950s, this argument was rejected (Gilmour Caterers v St Bartholomew’s Hospital Governors [1956] 1 QB 387).

The full implications of Franses are still to be worked out by the courts. A landlord may previously have been somewhat relaxed about having entered into the building lease prior to the hearing (AJA Smith Transport v British Railways Board [1981] 1 EGLR 54). However, in light of Franses you would be well advised to have signed on the dotted line prior to trial. That way you will be contractually bound to carry out the works and it will be much harder to question whether your intention is conditional.

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This article was written by Georgina Redsell and David Nicholls (Landmark Chambers). For more information, please contact Georgina on georgina.redsell@crsblaw.com or +44 (0)20 7203 8897.

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This article was first published in the Estates Gazette.