Jess Hopkins
Posted on 28 Oct 2019

Real Estate Soundbite: Business tenancy renewal

Average read time: 5.5 minutes. 

Security of tenure” is a phrase given to protective statutory rights granted to tenants who occupy premises for business purposes.

If a business tenancy qualifies for security of tenure, it will not come to an end at the expiry of its fixed term. Instead, the tenancy will continue until it is ended in one of the ways specified by the Landlord and Tenant Act 1954 (“the Act”).

Does my tenancy qualify for security of tenure?

A tenancy will qualify for security of tenure if it satisfies the criteria in section 23 of the Act. There are broadly three requirements:

  • A tenancy (typically a lease);
  • Occupation by the tenant for the purposes of a business; and
  • The tenancy must not be expressly excluded from the Act.

Business is given a wide definition by section 23(2) of the Act and includes a 'trade, profession or employment and in the case of a 'body of persons' any activity carried on by them. 'Any activity' means just that; it need not be a business or commercial activity. So, running a sports club has amounted to a business use under the final part of this definition, when carried on by a body of persons (Addiscombe Garden Estates Limted v Crabbe [1958] 1 QB 513).

It is possible for a tenancy to be excluded from the Act by agreement of the parties. The tenant is required to accept and read a 'warning notice' from the landlord and swear a statutory declaration in response, confirming they are aware of the statutory rights they are giving up.

How does security of tenure work in practice?

A protected tenant who wants to stay in the premises after the contractual expiry date may serve a “section 26 request” for a new tenancy on the landlord. Alternatively, he may do nothing, continue to occupy the premises on the existing terms and wait for the landlord to take action.  

A landlord who is happy for the tenant to stay on may choose to do nothing and allow the tenancy to continue indefinitely. Alternatively, they can serve a non-hostile "section 25 notice" on the tenant terminating the lease and proposing a new one on different terms, usually with higher rent. The landlord must indicate his proposals as to the terms of the new lease in the section 25 notice

Otherwise, he must serve a section 25 notice on the tenant terminating the lease on or after the contractual expiry date and opposing the renewal of the tenancy on one of the statutory grounds. The section 25 notice must be given between 6 and 12 months before the date on which the landlord proposes to terminate the tenancy.

If the landlord serves a section 25 notice, but the protected tenant wishes to renew his tenancy, the tenant should make an application to the court before the termination date stated in the s 25 notice.

A landlord who has been served with a section 26 request by the tenant and who opposes the renewal may serve a counter-notice on the tenant within two months of receiving the request.  If the landlord opposes a renewed lease, he must state the statutory grounds on which he will be relying.

Grounds of opposition

A landlord can oppose a renewed lease on any of the following grounds under section 30(1):

(a)        Tenant's failure to repair;

(b)        Persistent delay in paying rent;

(c)        Substantial breaches of other obligations;

(d)        Alternative accommodation;

(e)        Sub-letting of a part where higher rent can be obtained by single letting of whole building;

(f)         The landlord intends to demolish or reconstruct and could not reasonably do so without obtaining permission; and

(g)        Landlord's intention to occupy the holding for his own business or as a residence

The most commonly used ground by landlords is set out in section 30(1)(f) of the Act. The landlord can oppose a lease renewal 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 that he could not reasonably do so without obtaining possession of the holding."

A landlord seeking to rely on this ground needs to show a firm and settled intention and a reasonable prospect of carrying out the development.

The Supreme Court’s view

The Supreme Court's decision in S Franses Ltd v Cavendish Hotel (London) Ltd [2018] UKSC 62 has lessened the ability of landlords to oppose lease renewals. Lord Sumption (who gave the leading judgment) accepted that the touchstone of Ground (f) was a firm and settled intention to carry out the works in question.  This will be judged subjectively, on the facts of the matter in question.

Despite this, the landlord’s intention to carry out the works could not be conditional on whether the tenant chose to assert a claim to a new tenancy. The acid test was whether the landlord would intend to do the same works if the tenant left voluntarily.

Therefore, in order to establish the requisite subjective intention, landlords must overcome an additional hurdle: showing that they would carry out the same works if the tenant left voluntarily.

Tenant tactics

In London Kendal Street No3 Ltd v Daejan Investments Ltd [2019] 7 WLUK, the tenant accepted that the landlord intended to carry out the works and, unlike in Franses, there was no suggestion that the works were contrived with a view to removing the tenant.

Instead, they focused on the prospect of carrying out the development (which is judged objectively). The tenant tried to argue that the landlord could not show a reasonable prospect of being able to carry out the works because an injunction would be sought to prevent the works proceeding on the grounds of nuisance or breach of landlord’s covenants for quiet enjoyment.

The County Court decided that even if an injunction were to be granted, it would not be absolute, but be couched in terms which would allow the works to proceed whilst limiting potential disruption. The tenant could not therefore definitively show that the landlord had no real prospect of being able to do the works in question.

Whilst development works may attract complaints, this case shows that a tenant cannot use the threat of an injunction to make the landlords job arguably even harder following Franses to oppose a tenant's right to renew.

We will follow any further cases applying the Franses test with interest.

Compensation

The landlord will have to pay compensation to the tenant if the new tenancy is refused, unless the reason for the refusal is that the landlord has established ground (a), (b) or (c) (where the tenant is at fault) or ground (d) (where alternative accommodation has been provided).