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Intention not motive is key to landlords’ redevelopment rights

02 November 2017

The Landlord and Tenant Act 1954 is perhaps the most important legislation governing commercial leases and confers protection on business tenants known as ‘security of tenure’. That security can, however, be overridden by landlords in certain circumstances, which are set out in section 30(1) of the 1954 Act. The most common ground of opposition is known as ‘ground (f)’ and arises where the landlord intends to redevelop the premises leased to the tenant.

Where a landlord relies on ground (f) it is well established that it must be able to show that it has a settled intention to either demolish or carry out substantial works to the premises. What is less certain is whether the landlord’s motive for the particular work has to be genuine and whether the work itself has to be commercially viable. This was the issue that fell to be determined by the court in S Franses Ltd v The Cavendish Hotel (London) Ltd [2017].

Factual background

The tenant, S Franses Ltd, occupied a commercial unit on the ground floor and basement at 80 Jermyn Street in St James London, operating a textile dealership specialising in antique tapestries. The remainder of the building (forming the Cavendish Hotel) was managed and occupied by the landlord.

For planning purposes, the area of St James has been designated as a “Special Policy Area” by Westminster Council with a view to protecting and promoting art galleries in the area. In addition, the premises were recognised as having a specific use for planning purposes. Any change of use therefore required planning consent from the Council and any application would need to be considered in the context of the designation as a Special Policy Area.

The tenant served a notice on the landlord under the 1954 Act requesting a new lease of the premises. The landlord served a counter notice relying on ground (f). The tenant issued proceedings to challenge the landlord’s ground of opposition.

The landlord had submitted various planning applications for the redevelopment of the premises which it later abandoned after the Council had recommended them for refusal in light of its specific policy for the area. This prompted the landlord to devise a new scheme which involved internal works only which did not require planning permission. The works would ready the premises for conversion into two separate units, albeit that planning permission would ultimately be required if the premises were to be put to commercial use. The essential feature of the new scheme was that it was put together solely to satisfy ground (f). Interestingly, the landlord made no attempt to hide the fact that the scheme had been designed for the purposes of ground (f) so that it could claim back possession from the tenant, but otherwise conferred no commercial or practical benefit. It also conceded that, if the tenant were to vacate voluntarily, it would not undertake the works at all.

The tenant challenged the landlord’s opposition primarily on the basis that the landlord’s intention to carry out the new scheme was conditional on the actual work being necessary in order to satisfy ground (f). It was argued that it could not have been the intention of the 1954 Act to allow landlords to circumvent the statutory protection conferred on business tenants by undertaking works for the sole purpose of getting the court to make an order under the 1954 Act. Rather, it was argued that the proposed works must serve some useful purpose and be commercially viable.

Decision

It was held that a landlord’s intention to carry out the works was a different concept from its motive. Whilst it was accepted by the judge that the more commercially unviable or artificial a particular scheme was, the closer the court will wish to examine the landlord’s stated intention to ensure that it was genuine, the motive for the work, of itself, does not undermine a landlord’s position where it has a genuine and settled intention to proceed. The judge placed particular weight on the fact that a director of the landlord company had given an undertaking to the court that it would carry out the works as soon as vacant possession had been obtained (a breach of which would result in contempt of court) which the judge treated as compelling evidence of the landlord’s settled intention.

What are the implications of the case for landlords and tenants?

The decision is good news for landlords. As matters stand, the correct test under ground (f) remains whether the landlord has a genuine and settled intention to undertake the works. The landlord’s underlying motive for doing the work or the viability of the proposed scheme are not therefore relevant considerations for the court to take into account – though the motive for the work might cast doubt on whether the intention to undertake the works is genuine or not. However, where an unequivocal undertaking is given by the landlord, that is likely to be treated as compelling evidence of the genuineness of its intention.

Landlords with deep pockets will therefore be entitled to devise a purely artificial scheme of work to secure vacant possession without having to identify the particular benefits of the scheme.

But all is not lost for tenants. As the judge considered the issue of particular public importance he granted a certificate for an appeal directly to the Supreme Court, so the decision could still be overturned. But for now, the advantage remains with landlords.

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