In S Franses Ltd v The Cavendish Hotel (London) Ltd [2018] UKSC 62 the Supreme Court has given landlords and tenants of commercial premises new guidance on the operation of ground (f) of section 30(1) of the Landlord and Tenant Act 1954, in particular a landlord's ability to refuse a new business lease to its tenant on grounds that the landlord intends to redevelop the premises.
Background
On 5 December 2018, the Supreme Court gave its decision in what Lord Sumption described as a remarkable case, which examined the requisite intention a landlord must show to oppose a new lease pursuant to ground (f) of section 30(1) of the Landlord and Tenant Act 1954 ("ground (f)").
Under ground (f) a landlord must show that it has an intention to demolish or otherwise reconstruct the premises (or a substantial part) at the end of the current lease, and that it cannot do so without the tenant giving up possession.
The landlord refused to grant its tenant a new lease of the premises on the basis that it planned "substantial work" on the building, relying on ground (f), but admitted that it had designed extensive and expensive works (a value in excess of £750,000) purely as a mechanism of getting the tenant out. The proposed works included demolishing and rebuilding walls in the same position and constructing retail space without any street access. Such works had no practical value and were ultimately meaningless. The landlord made clear that it would do whatever it took to get the tenant out of the premises (including, as is common practice, providing an undertaking to the Court that it would implement the scheme in order to support its evidence of intention), but admitted that if the tenant were to leave voluntarily it would not in fact carry out the proposed redevelopment works.
The decision
The Supreme Court held that the nature or quality of the landlord's intention was not sufficient for the purpose of ground (f). Lord Sumption, giving the leading judgment, held that the "acid test" is whether the landlord would intend to do the same works if the tenant left voluntarily. As the landlord did not intend to carry out the works if the tenant vacated voluntarily, the Court ruled that the landlord's intention was conditional and not the fixed and settled intention that ground (f) requires.
Lord Sumption emphasised that the statutory test is to show that the proposed works are being obstructed by the tenant's occupation of the premises, rather than the proposed works being used simply as a device to obtain possession of the premises. The purpose of ground (f) is not as a mechanism to protect the landlord's right to obtain vacant possession, but rather to protect the landlord's interest in redevelopment of its premises.
There is scope for more complex issues to arise where a landlord unconditionally intends to carry out an insufficiently substantial part of its proposed scheme, and proceeds to add in extra works for the sole purpose of obtaining vacant possession. Lord Sumption commented that in such cases, the Court would be expected to have regard only to the landlord's unconditionally intended works, which could prove fatal to its reliance upon ground (f) if insufficiently substantial.
Comment
This decision is important for landlords and business tenants alike as it introduces a new element in dealing with ground (f) challenges to a new lease.
The Supreme Court's decision will make the process of opposing a lease renewal on ground (f) more onerous as wholly artificial works devised by landlords in order to achieve vacant possession in similar circumstances to this case will fail. Landlords should therefore be prepared to face questioning as to the viability of their proposed schemes in order to establish whether their intention is independent of the tenant's statutory right to a new lease.
In the post-Franses landscape, it will be increasingly important for landlords to design their redevelopment schemes with a view to producing a commercially viable scheme that is sufficiently destructive of the tenant's demise to meet the overall test of ground (f). Nevertheless, landlords should still be able to approach most ground (f) claims in confidence, in the knowledge that the Court will not allow a tenant to frustrate a genuinely and unconditionally intended redevelopment scheme.
