Landlord's opposition to a lease renewal on redevelopment grounds

Landlord’s opposition to a lease renewal on redevelopment grounds – is there a need for law reform?

The recent case of Sainsbury's Supermarkets Ltd v Medley Assets Ltd [2024] demonstrates how, with careful consideration and timely tactics, a commercial tenant can defeat their landlord’s opposition to the grant of a new tenancy under section 30(1)(f) of the Landlord and Tenant 1954 Act (“Ground (f)”).

The Sainsburys case considers the definition of a “holding” in the context of opposed lease renewals and a tenant’s ability to continue to occupy the premises in question whilst the landlord carries out its redevelopment works.

The law

A commercial tenant has a statutory right to seek a new lease at the end of its contractual term if it satisfies section 23 of the 1954 Act.

A landlord may oppose the tenant’s request for a new lease on any of the grounds set out in section 30(1) of the Act.

One of the grounds often relied upon is Ground (f), the “redevelopment ground”, which states that a lease renewal may be opposed if:-

"... 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 work of construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding."

The interpretation of Ground (f) was considered in detail by the Court in Sainsbury’s v Medley Assets.

The facts

• This case concerned a Sainsbury’s Local store on Kentish Town Road in London;
• Sainsbury’s had a protected lease of the whole building but only operated the supermarket from the ground floor. Importantly (for this case), Sainsbury’s did not use the basement and upper floors;
• The landlord, Medley Assets (‘Medley’), served on Sainsbury’s a section 25 notice terminating the tenancy on the basis of Ground (f);
• Medley’s initial plan was to convert the upper floors into residential flats. By the time that the case reached trial, Medley had altered their plans. The revised plans were to install offices in the upper floors, to lower the basement floor, and to widen the staircase;
• Other than a small section of the ground floor which Sainsbury’s used for storage, the Medley’s plans for redevelopment had no effect on the operation of the supermarket;
• Sainsbury’s vacated the small section of the ground floor a week before the preliminary trial, but continued to occupy the remainder of the ground floor.

The Court was required to determine whether, in the context of an opposed lease renewal, a “holding” is the area over which the tenant is in actual occupation, or is instead the whole premises as demised by the lease.

Medley’s argument was that “holding” should be interpreted in the same way as in section 32(2) of the 1954 Act which allows a landlord to insist that on a proposed lease renewal, a tenant’s “holding” is of the whole of the premises (regardless of the tenant’s actual occupation).

The decision

The Court disagreed with Medley’s approach and held that for the purposes of Ground (f), “holding” is defined as the part of the premises that the tenant actually occupies at the date of the trial. It further held that because the intended works by Medley did not encroach on Sainsbury’s holding (ie the occupied part) at the time of the trial, Medley were unable to rely on Ground (f) to oppose the tenant’s request for a new lease.

Lessons?

This case demonstrates how a shrewd commercial tenant may be able to thwart a landlord’s attempt to rely upon Ground (f) by vacating part of the demised premises before trial.

The effect of section 32(2) of the Landlord and Tenant Act 1954 is that once the tenant has successfully defeated the landlord’s Ground (f) opposition, and the redevelopment works are complete, the tenant is entitled to take a new lease of the whole premises demised under the current lease.

In essence, a tenant can temporarily limit its occupation to a small part of the premises, allow the landlord to carry out the development works, and then, once the works are finished, move out of the small area and back into the whole area demised by the lease.

The decision in Sainsbury’s is a County Court judgment and is not binding. However, it is important that both tenants and landlords note the approach taken in this case and take legal advice when Ground (f) is relied upon.

Some have suggested that this ‘loophole’ in the law is a further signal for reform of the Landlord and Tenant Act 1954. In light of the upcoming general election and the fact the Act does not feature in any of the manifestos, it seems unlikely that reform of the Act will be on the cards in the short term.

If you have any questions relating to the issues raised in this blog, please contact Hughes Paddison’s Property Litigation team at aet@hughes-paddison.co.uk.