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Redevelopment Repercussions - how to terminate a business lease due to redevelopment

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Landlords will be familiar with the protection afforded to business tenants when it comes to lease renewal under the Landlord and Tenant Act 1954. 

At the end of WWII, commercial property was at a premium.  Business tenants found that when they reached the end of their lease and despite having done nothing wrong, landlords would re-let the premises to other tenants with no compensation.  The 1954 Act was intended to redress the balance and the landlord now has to rely on one of seven fairly limited statutory grounds to recover possession.  Over the years, a large body of case law has developed in support of the grounds of opposition putting the landlord to proof.

There are three tenant “fault” grounds, including the tenant’s failure to comply with its repairing obligations, the tenant persistently delaying in paying rent, or some other substantial breach of the tenant’s obligations under the lease.

However, the ground most frequently relied upon is “redevelopment” – or ground (f)…. “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 works of construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding”. 

The onus is on the landlord to prove its intention and show that there is a reasonable prospect of it doing those works.  The landlord’s intention must be more than one of contemplation, but does not need to be set in stone.  If the landlord is a company, it can pass a resolution at a directors’ meeting to form an intention.  Planning permission does not have to have been obtained, although it is an advantage to have obtained planning permission, or made an application and had conversations with the local authority about the proposed development.  Plans and drawings will help the landlord prove its fixed intention, and tender for the works.  Evidence of finance should be in place, for example its accounts if the landlord intends to finance its works.

The landlord only needs to prove its intention at the date of the hearing.  Even if its planning application has failed by that date, the landlord can still show that it has a reasonable prospect of achieving the development on appeal. 

It can therefore be difficult for a tenant to successfully challenge such a stated intention when it receives a landlord’s section 25 notice seeking to terminate its business tenancy on ground (f).   Good practice suggests that a landlord should provide the tenant with early evidence of its intention, although with redevelopment, the tenant is often aware as it will have received notice from the local authority of the landlord’s planning application, if one has been submitted.  Minutes of a directors’ meeting and/or evidence of financing can be persuasive evidence of the landlord’s intention.

If the landlord is relying on the redevelopment ground, or any of the other ‘no-fault’ grounds, the tenant is likely to be entitled to statutory compensation.  Under the 1954 Act, this is quantified with reference to the rateable value of the holding.  Some landlords may be prepared to negotiate the amount payable to avoid drawn out proceedings which could delay its redevelopment intentions and ensure the tenant vacates at an early date, although this cannot be guaranteed.

To discuss your obligations as a landlord, contact Helen Porter on 023 8071 7717 or email helenporter@warnergoodman.co.uk

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.