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Articles 11th Dec 2023

Travis Perkins – Real Estate Bulletin – Winter 2023

In this quarter’s update, we look at three landlord and tenant cases, two of which involve break options in renewal leases, and one concerning a landlord’s ability to adjust service charge proportions.


Renewal lease – Landlord’s break right

A tenant wanted to renew its lease of retail/garden centre premises. The landlord had previously missed the opportunity to oppose the tenant’s request for a new lease due to an internal administrative error. Had this error not occurred, the landlord would’ve opposed the new lease on the redevelopment ground, on the basis that it had entered into an agreement to grant a new lease to another retailer who wanted to build a new store on the site.

In light of the agreement with the new occupier, the landlord wanted to limit the length of the renewal term it would have to grant to the existing tenant. The tenant had suggested a 10-year term with no break; the landlord was looking for an 18-month term with a rolling right to break on six months’ notice for redevelopment purposes. The County Court settled on a middle ground of a five-year term but with a landlord’s break right which could be exercised immediately.

The tenant appealed the decision in the High Court, but was unsuccessful.

Practical tips:

  • Practical tip – there is a balancing act to be done on renewal to ensure the rights of a tenant with security of tenure and a landlord’s right to recover possession for redevelopment are both taken into account.
  • Practical tip – for landlords to successfully oppose a new lease on redevelopment grounds, the redevelopment proposals must be genuine (so not conjured up to try and defeat the tenant’s claim) and be deliverable on a practical level.
  • Practical tip – each case will turn on its own facts, but this decision reiterates the hurdles a landlord must jump to prove the redevelopment ground, even though in this particular case, the landlord missed the race entirely the first time around!

 

Renewal lease – Landlord’s break right…again

A tenant had four leases which, taken together, comprised a car showroom on Park Lane in London. The landlord did not oppose the renewal of the leases. Most of the terms had been agreed between the parties, save for the landlord’s wish to include a landlord’s break option.

The landlord wanted a right to break at any time between the second and fifth anniversaries of the term commencement date on giving six months’ notice. This was because it wanted to operate its own business from part of the premises, the central showroom, itself in the future.

Unfortunately for the landlord in this case, its “plans” to use the premises for its own occupation had not really extended beyond “exploring” and “looking at the possibilities” of operating a business selling classic cars that had been converted to electric vehicles. Its evidence was vague and unsupported and it seemed to the court that the intention was predicated on there being a break clause in the new lease, rather than the other way round.

Practical tips:

  • Practical tip – landlords have to demonstrate a similar level of “firm and settled” intention when it comes to opposing a lease renewal on the own occupation ground as they do for redevelopment.
  • Practical tip – remember that even where a landlord is successful in getting a break option into a renewal lease that is within the Landlord & Tenant Act 1954, they must also serve a Section 25 notice in addition to the contractual break notice.

 

Service charge proportions – Adjustments

Under the terms of its lease, a tenant was obliged to pay a “Specified Proportion” of the service charge costs. The landlord was able, through its surveyor, to increase or decrease that proportion “if in the reasonable opinion of the Surveyor it shall at any time become necessary or equitable to do so”.

The tenant disputed how his Specified Proportion had been calculated, bringing a claim in the First Tier Tribunal and then appealing to the Upper Tribunal.

The tenant was unsuccessful.

Practical tips:

  • Practical tip – although this case actually involved a residential lease, similar principles can be applied to service charge provisions in commercial leases.
  • Practical tip – where a party to a contract has the power to exercise discretion or to form an opinion, the courts may imply a term that the decision-making process must be lawful and rational, that the decision must be made rationally and in good faith and consistently with its contractual purpose.
  • Practical tip – that said, in commercial leases, it is always better to make sure any such discretionary powers are suitably limited in express terms to avoid relying on the court.

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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