Opposing a lease renewal without paying compensation

Background

A tenant of a business lease has a statutory right to a lease renewal at the end of the contractual term, if it satisfies criteria in section 23 of the Landlord and Tenant Act 1954 (LTA 1954) i.e. it occupies the property for the purposes of a business.

Landlords may only oppose a tenant's application for a new lease on specific grounds set out in the LTA 1954.

Under section 30(1)(c) (ground (c)) the landlord is entitled to oppose a tenant's right to a lease renewal on the ground:

"that the tenant ought not be to be granted a new tenancy in view of other substantial breaches (apart from failure to pay rent) by him of his obligations under the current tenancy, or for any other reason connected with the tenant's use or management of the holding."

So there are in fact two grounds of opposition:

• ‘Substantial breaches under the current tenancy.’
• ‘Another reason connected with the use or management of the holding.’

Historically, this has been a very difficult hurdle for landlords, and therefore ground (c) was seldom used. The main advantage for landlords though is that if the ground is used then there is no obligation to pay the tenant compensation for its failure to obtain a new lease (unlike with the redevelopment or “own use” grounds under (f) and (g)). Depending upon how long the tenant has occupied the property, compensation could be payable at 2 x the rateable value.

The landlords in the following cases relied upon section 30(1)(c) of the LTA 1954 to successfully frustrate the tenant’s application for a new lease. The landlords did not have to pay compensation, nor did they have to sell/reconstruct/occupy the property in order to satisfy the court that the tenant should not be granted a new lease.

Horne & Meredith Properties Ltd v Cox

In this case the tenant wrongly asserted over many years, that the landlord was fraudulent.  This had cost the landlord thousands of pounds in litigation costs regarding rights of way and the right to park vehicles for the benefit of the property under lease.   The landlord served a section 25 notice to terminate and relied upon ground (c). The Judge decided in favour of the landlord, stating that it would be 'an affront to require a landlord to grant protection to such a tenant’ and that the tenant’s approach in litigation had ‘grotesquely exceeded any reasonable balance of judgement.’ The tenant appealed.

The Court of Appeal upheld the initial decision and dismissed the  appeal, holding that the history of litigation was a ‘reason connected with the use or management of the holding.’ (pursuant to the second limb of ground (c)) since the litigation was concerned with the rights granted under the tenancy.

Youssefi v Mussellwhite

The court found that the tenant was in breach of its covenant to repair -a separate ground of opposition to a new lease under section 30(1)(a). The tenant had also committed other breaches of the lease under section 30(1)(c) i.e. substantial other breaches of the lease.The tenant appealed successfully in relation to ground (a) but lost its appeal in relation to ground (c). The breaches in question were:

• Access covenant:  The tenant had been obstructive in allowing the landlord access to the property to view its state and condition, in a way which undermined the efficient working of the relationship between landlord and tenant. The Court of Appeal agreed with the trial judge’s reasoning.
• User covenant:  The lease required the property to be used for a use with Class A1 or A3. The tenant did not run a business with Class A1 or A3 and the judge found that it had no intention to do so, despite being on notice for three years that this covenant had been breached. Again, the Court of Appeal agreed with the reasoning of the Judge in the lower court. The Court of Appeal agreed that in the special circumstances of the case the breach was substantial and prejudicial to the legitimate interests of the landlord.

What this means for landlords and tenants of business premises

It is likely that landlords may now be more willing to try and rely upon ground (c) to frustrate a tenant’s claim for a new tenancy.

The historic position used to be that the landlord would make plans to re-develop or occupy the property for its own business in order to remove a problem tenant (ground (f) or (g) ) where no other means were available.  If these grounds were made out the court was obliged to refuse to grant the tenant a new tenancy. However, such an approach has always meant that where a landlord opposes a new lease on these grounds and no other, it will be obliged to pay compensation on the tenant quitting the holding, whether or not it makes an application to the court for a new lease.

There is now further guidance for landlords in respect of using the discretionary ground (c) which landlords may be able to use to oppose a tenant’s application for a new lease, either where the discretionary grounds are not available or where ground (c) can be used in addition, thereby avoiding having to pay statutory compensation to the tenant.