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Court considers redevelopment ground for opposing business lease renewals

A recent court decision in England provides valuable lessons to landlords seeking to oppose the grant of a new lease highlighting the importance of proper preparation and planning in terms of lease renewal and property works, experts have said.

The case involved a Sainsbury’s Local store in London. Sainsbury’s operated a supermarket from the ground floor. The relevant lease also included upper floors and a basement, which had been vacant for some years.

The lease was protected by the Landlord and Tenant Act 1954 and had not been “contracted out” – which meant that Sainsbury’s was entitled to renew the lease under the 1954 Act. The process for doing that is via an application to the court, if the parties cannot agree the terms of the new lease by consent.

The landlord, Medley, intended to redevelop the premises and therefore served notice upon Sainsbury’s. The notice opposed the grant of a new lease on the basis of ground (f) of section 30(1) of the 1954 Act – which allows for renewal of the lease to be refused if the landlord plans to demolish, reconstruct or carry out substantial works of construction on part of or all of the holding, if the landlord could not reasonably do this without obtaining possession of the holding. Sainsbury’s applied to the court for a lease renewal.

By the time the case was brought before the court, Medley’s position had changed.  It now asserted that it intended to lower the floor in the basement, make changes to a small area of the ground floor affecting a staircase and refurbish (rather than redevelop) the upper floors.

In this case, the judge decided that a novel and important point of law was the relation to the extent of “the holding” (a term used in the 1954 Act) for the purposes of opposed lease renewals. Under the 1954 Act a tenant is only entitled to a new lease of “the holding”, being the parts of the building subject to the lease that it is actually occupying for its business. When granting a new lease, the court will determine what constitutes “the holding” by considering the circumstances existing “at the date of the order”.

However, there is a further complexity with opposed lease renewal claims, as these are heard in two stages: first, the landlord’s opposition is dealt with as a preliminary issue, and then if the landlord fails to satisfy its grounds (i.e. redevelopment), a second hearing, often months later, may be necessary to determine the terms of the proposed new lease. This means it is important for courts to be aware of any intended works to “the holding” at the trial of the preliminary issue, and if those works may be possible without regaining possession of the entire building.

Here, Medley had invoked another provision of the Act to require Sainsbury’s to take a new lease of the entire building in the event of its opposition failing and not just “the holding” – the ground floor. This provision aims to avoid a landlord being left with unlettable areas of a property. Under this provision, section 30(2), the holding “shall be construed as references to the whole of the original demise” – being the property that is the subject of the lease.

Medley argued that the ground (f) opposition meant “the holding” should be read with reference to the whole property, including the basement and second floor, meaning that proposed works to the basement, a small area of the ground floor and upper floors would be relevant for deciding where ground (f) has been satisfied. Medley argued that if this was not the case, it would allow Sainsbury’s to retreat into a small area of the building ahead of the trial, defeating the opposition because there were no planned works to “the holding”, while still being entitled to a new lease over whole of the original demise.

Sainsbury’s argued that this was against the clear wording of the Act.

The judge agreed with Sainsbury’s, stating that “the holding” for purposes of ground (f) was restricted to those parts of the building the tenants are occupying at the time of court hearing to determine whether the landlord had satisfied ground (f). It meant that the proposed works to the vacant parts of the building (i.e. the parts not occupied by Sainsbury’s) did not fall within ground (f).

Property litigation expert Ian Whitehead of Pinsent Masons said: “The Sainsbury’s case illustrates the importance of early preparation by the landlord when it comes to opposed lease renewals. Whilst it is clear for ground (f) that the date at which the landlord is to satisfy the ground is at trial of the preliminary issue, in this case the landlord changing its plans from a residential development to commercial office space since the service of its notice appears to have undermined its position on having a “firm and settled” intention to undertake the works. Further, the judge made it clear that he was dissatisfied with the overall strength of the landlord’s expert evidence.”

Richard Bartle, property dispute resolution expert at Pinsent Masons said: “The decision is a little surprising insofar as it suggests that a tenant can vacate part of the premises it occupies pending trial of a landlord’s application to terminate a lease under ground (f) and then go back into occupation of the whole after that trial in order to obtain a renewal lease of the whole of the premises.  Whilst many tenants will not be able to do so in practice, landlords would, for now, be well advised to consider the issue of whether its tenant is capable of operating only from part when contemplating opposition under or termination proceedings under ground (f). In the meantime, it will be interesting to see if there is an appeal of this decision.”

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