Opinion

Testing time for commercial landlords?

19th February 2019

The recent Supreme Court ruling in the much-anticipated S Franses Ltd v The Cavendish Hotel (London) Ltd is set to have far reaching implications for both landlords and tenants.

Paul Barker, property litigation specialist at Higgs & Sons, said: “This decision has reinforced the protection enjoyed by business tenants and imposes a new hurdle for commercial landlords looking to obtain possession for redevelopment. Both landlords and tenants should be aware of this important decision and the ‘acid test’ it introduced.”

The case involved a landlord’s opposition to a lease renewal under the Landlord and Tenant Act 1954 (1954 Act), on the grounds of redevelopment (ground (f)). To oppose on redevelopment grounds a landlord must prove both that it has a genuine intention to carry out qualifying works and that it would be practically able to do so by overcoming any obstacles, such as the need for planning permission. To succeed, the intended works must be sufficiently substantial.

In this case, the landlord (Cavendish Hotel) opposed a new lease being granted to the tenant (S Franses) of a retail art gallery and showroom, based on a package of works which had no practical use and in fact made one of the retail units unusable because it had no entrance from the street. By the landlord’s own admission, the works, costing almost £780,000 plus VAT, had been designed solely to obtain vacant possession from the tenant. The landlord would not have carried out the works if they weren’t necessary to remove the tenant, for example because the tenant left voluntarily. The landlord had succeeded in the County Court and High Court, but the tenant appealed.

In what is arguably the most significant property case of 2018, the Supreme Court disagreed with the lower courts’ view that the landlord had the nature or quality of intention needed to successfully oppose a new tenancy on redevelopment grounds, even though the landlord had given an undertaking to the court that it would carry out the works. Although the decision confirmed that ‘motive is irrelevant save as being material for testing whether such a firm and settled intention exists’, that did not assist the landlord here, whose intention was held to be conditional on the tenant requesting a new lease.

Giving the leading judgment, Lord Sumption said that: “The acid test is whether the landlord would intend to do the same works if the tenant left voluntarily.” Having decided that Cavendish Hotel would not in fact have done the same works, he went on to find that “…a conditional intention of this kind is not the fixed and settled intention that ground (f) requires.” On that basis, the tenant was entitled to a new lease.

Paul added: “In applying the ‘acid test’ courts will now scrutinise much more closely what is behind a landlord’s decision to undertake works and whether the same works would be carried out if the tenant had left voluntarily. This will be particularly the case where it is unclear what commercial or other benefit is to be derived from the works.

“Where a landlord has ‘beefed up’ a proposed package of works because the work originally planned was not substantial or disruptive enough to succeed on ground (f), the acid test will also apply to those works; landlords who would previously have been confident of succeeding on ground (f) may now have to think again.”

According to Jennifer Hicks-Jones, of the commercial property team at Higgs & Sons: “While on the face of it good news for tenants, because the judgment will restrict the ability of landlords to redevelop their properties, this may make them reluctant to grant leases with 1954 Act protection, resulting in less security for tenants.

“Tenants may also find themselves tied into older, dilapidated properties for longer, with landlords unable to unlock development opportunities.”

Paul concluded: “Our advice to landlords considering redevelopment where ground (f) will apply is to proceed with caution and seek specialist legal advice at an early stage.”

 

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