UK County Court rules in favour of landlord imposing redevelopment break into renewal lease

In the case of B&M Retail Ltd v HSBC Bank Pension Trust (UK) Ltd, the court was asked to determine the outstanding terms of the lease being renewed pursuant to the Landlord and Tenant Act 1954, specifically on the length of the term and whether it should include a redevelopment break clause. The Central London County Court decided in March in favour of the landlord and granted a redevelopment break operable immediately on six months' notice.

This decision will be of particular interest to landlords as it deals with the situation where a landlord wishes to oppose the grant of a new tenancy to the tenant on redevelopment grounds, but has failed to serve its required counternotice of opposition once the tenant has served its notice under section 26 of the act. The decision suggests that landlords may have a second bite of the cherry in this situation and highlights the challenges business tenants could face when attempting to prevent a landlord's redevelopment of a property it occupies.  

Dispute background

The defendant landlord, HSBC Bank Pension Trust (UK) Ltd, owned a premises in North London which it let to the claimant tenant, B&M Retail Ltd, for trading as a retail store. The lease expired in December 2020. In May 2019 HSBC entered into negotiations with Aldi Stores Limited for the grant of a conditional agreement for lease (subject to obtaining vacant possession and satisfaction of a planning condition) under which Aldi would be obliged to carry out redevelopment works at its own cost on behalf of HSBC. In preparation for this, HSBC served a "hostile" section 25 notice in May 2021 seeking to terminate the lease with B&M citing the redevelopment ground under section 30(1)(f) of the act.

However, B&M had already served its own request in January 2021 under section 26 of the act for the grant of a new tenancy and HSBC had failed to respond within the required two month deadline. HSBC cited mailroom administrative issues caused by the Covid-19 pandemic which led to the notice being misplaced as everyone was working from home.

Following what the court described as this "fortunate break" for B&M, HSBC was prevented from opposing the grant of a new tenancy. This presented a challenge for HSBC: if unable to satisfy the pre-conditions in the agreement with Aldi by the longstop date in February 2025, then either party would be able to terminate the agreement.

Unable to oppose B&M's request for a new tenancy outright, the terms of the new lease were substantially agreed between the parties prior to the hearing but the key terms in dispute were the length of the tenancy and whether the tenancy should contain a rolling break clause for redevelopment.

Expert evidence

B&M sought a term of 10 years with no break, while HSBC sought a term of 18 months with a break option operable on six months' notice.

The court has wide discretion as to the terms and length of any new tenancy where the parties are unable to reach agreement. Section 33 of the 1954 act provides that the term shall be one that is "reasonable in all the circumstances" subject to a maximum length of 15 years. Section 35 provides that in deciding on any other terms (including the inclusion of a break clause) the court shall "have regard to the terms of the current tenancy and to all relevant circumstances."

In exercising this discretion in relation to the inclusion of a redevelopment break, the court was referred to the leading case of National Car Parks Limited v Paternoster Consortium [1990] 1 EGLT 99 which held that there must be "a real possibility (as opposed to a probability) that the premises will be required for reconstruction during the continuance of the proposed new tenancy…to include in the terms of the new tenancy a break clause which will enable such reconstruction to take place.”

The dispute centred on whether HSBC could establish that there was a "real possibility" that it would be able to obtain planning permission to allow the works to be carried out as set out in the agreement for lease with Aldi.

B&M sought to rely on expert evidence setting out that there was no real possibility of planning permission being granted on the grounds that it ran contrary to a number of established policies for the local area. B&M also pointed to the financial disruption that would be caused to its trade and occupation if the new lease could be terminated within six months of being granted. 

However the evidence put forward by HSBC's expert pointed to a number of factors specific to the premises which suggested that permission would be granted. HSBC stressed the prejudice that it would suffer if its ability to carry out the works with Aldi was compromised by the grant of a new lease without an appropriate break right.

Decision in favour of landlord

The judge preferred the "sound and practical opinion" of HSBC's expert evidence, which it said was based on a careful examination of this size and likely success of this application as opposed to the evidence of B&M's expert which did not take sufficient account of the relevant context.

The court emphasised that if there is a real possibility that redevelopment can take place, a break clause ought to be included unless there is some "major factor pointing the other way". It reminded the parties that it was not the policy behind the 1954 Act to permit the rights of a tenant and its security of tenure to stand in the way of redevelopment and reconstruction of commercial property.

As a result, the court agreed to the inclusion of the redevelopment break clause, exercisable immediately on six months' notice, as it allowed the new lease to be brought to an end within a timeframe sufficient to facilitate HSBC's agreed works with Aldi. The court took a middle ground in relation to the term of the lease and imposed a five-year lease, albeit this will have been of little comfort to B&M given HSBC's clear intention to exercise the break.

Osborne Clarke comment

While the facts of this case arise from an unfortunate administrative error, there are a wide range of circumstances in which a landlord may overlook the requirement to oppose a tenant's request for a new tenancy. It might have been thought that if the landlord has put itself in the position where it is unable to oppose the grant of a new tenancy, then the court might have limited sympathy; however, this was not the case.

This decision will be welcomed by landlords in this situation given that the court has indicated that it will only disrupt a landlord's redevelopment plans where there is clear evidence that those proposals are not viable. However, it still serves as a cautionary reminder to landlords (as substantial costs could have been saved by HSBC if it had done so) of the importance of responding within the required two months to a tenant's section 26 notice if you wish to oppose the grant of a new tenancy.

Business tenants may be concerned that the court was not swayed by the tenant's arguments as to the disruption caused to its business and the implications for local jobs.

This is a decision of the County Court and may be appealed; however, it suggests that parties will need to interrogate carefully the redevelopment intentions of the landlord when considering a renewal. Where those intentions are well grounded then the fact that the renewal is unopposed will not prevent the landlord from securing an early break even if this causes prejudice to the tenant.

Maryam Tariq, a Solicitor Apprentice with Osborne Clarke, contributed to this Insight.