English High Court rules in favour of landlord opposing lease renewal under 'ground G'

The recent judgment in MVL Properties (2017) Ltd v The Leadmill Ltd on opposed business lease renewals considered the objective and subjective tests under the Landlord and Tenant Act 1954 (LTA) ground 30(1)(g) that are applied to prove if a landlord's intention to occupy premises is for business purposes or as a residence.

Irrespective of the evidence produced by the landlord (MVL), the tenant (Leadmill Ltd) argued that there were insurmountable legal challenges that prevented the court from granting an order refusing the grant of a new tenancy.

The court was asked to consider and decide on the concept and nature of "adherent goodwill", whether "ground G" could apply in an instance where the landlord intends to carry on "essentially the same business". The court was also required to consider the effect of the Human Rights Act 1998 on ground G.

Venue lease dispute

The Leadmill is a music venue and nightclub in Sheffield, which was originally a community project started in 1980. The venue was leased to Leadmill Ltd which undertook extensive refurbishments and operated it as a commercial enterprise. The most recent lease created a term of 20 years starting in March 2003 and was protected under the LTA .

The lease included provisions for compensation for improvements made by Leadmill Ltd and allowed it to remove fixtures and fittings at the end of the lease. Leadmill Ltd was also required to keep the property in good repair, but in no "better state of repair than was recorded in a schedule of condition attached to the Lease".

The freehold of the Leadmill venue was put up for auction in or around 2013 and Leadmill Ltd offered £150,000, which was not accepted by the vendor. The freehold was acquired by MVL in 2017. MVL is a subsidiary of Electric Group Holdings Limited, which operates music venues across the UK.

MVL served notice under section 25 of the LTA 1954 to terminate the tenancy on 26 March 2023, opposing the grant of a new tenancy on the basis of ground G.

In September 2023, MVL was granted a shadow licence for the venue which had been fiercely opposed by Leadmill Ltd.

Ground G: determining intention

The burden of proof was on the landlord in respect of establishing, both subjectively (a firm and settled intention) and objectively (a reasonable prospect of achieving the intention) that it intended to occupy the premises for the purpose of carrying on a business.

Subjective test

MVL provided an undertaking to the court to undertake works to fit out the premises as a music and entertainment venue. This undertaking in itself was enough to meet the subjective test; however, there was also an abundance of supporting evidence, including spending £380,000 on applying for planning consent, consulting designers on the refurbishments, seeking licences and paying substantial legal fees.

The court noted that MVL had committed substantial sums to its project, which dwarfed the sum Leadmill was prepared to commit to the purchase of the freehold.

Objective test

The court considered the position at the termination of the current tenancy. MVL's expert evidence was preferred over Leadmill Ltd's, which was seen to be less consistent and coherent. The court found that MVL had a realistic prospect of completing the necessary works, with estimated costs of around £2.1 million and a duration of 35 weeks.

MVL had available funding, including a £3 million loan offer and substantial funds in Electric Group's bank account. The court was satisfied that MVL could afford the necessary expenditure. Leadmill Ltd raised several challenges, including the length of the reinstatement and refurbishment programme, financial viability and the likelihood of borrowing. The court rejected these challenges, finding MVL's plans realistic and financially viable and reaffirmed that refurbishment or fitting out is occupation for the purposes of a business.

Legal obstacles

The tenant argued that MVL's intention to carry on "essentially the same business" would result in the appropriation of the tenant's adherent goodwill, contravening article 1 of the First Protocol (A1P1) to the European Convention on Human Rights.

The term "adherent goodwill" refers to an enhancement in the letting value of the property due to the business conducted there. Leadmill Ltd argued that this would be appropriated by the landlord, MVL, if they took over the premises. According to the director of Leadmill Ltd, Mr Mills, "the Leadmill name" and the building were indivisible.

The court emphasised that the existence of adherent goodwill cannot merely be asserted; it must be proven by the tenant. Leadmill Ltd presented a schedule of predicted earnings for the venue if they continued to conduct their business for the next 20 years and valued their goodwill at £100,000 in their accounts to the year-end 31 March 2023.

Court's analysis of the evidence

Mr Mills, the director of Leadmill Ltd, was entitled to compensation of around £665,000 for improvements made to the premises. However, if unable to secure a new tenancy, he planned to remove all fixtures and undo the improvements, reducing the premises to a derelict state. This action, costing approximately £70,000 plus the cost of making good, would forfeit the compensation. Mr Mills claimed he could sell the dismantled dancefloor as souvenirs and reuse some sanitary ware, but the court found this reasoning unconvincing.

Accordingly, it had not been proven that MVL intended to carry out "essentially the same business" as Leadmill Ltd and instead held that MVL would be "comprehensively refurbishing a derelict shell to its own specifications" and creating its own brand and targeting a "new set of young people" as proof to the contrary.

Osborne Clarke comment

Despite plans for reform, the LTA in its current iteration will likely apply for many more months if not years to come. This case sets out a useful benchmark in relation to requirements to prove intention, which may also apply to landlords seeking to oppose the grant of a new tenancy on the basis of an intention to redevelop under s. 30(1)(f).

The decision serves as a reminder that it is not for the courts to examine the financial wisdom of a landlord's genuinely held plans but whether it can prove "the fixity of intention". It also reiterates the importance of instructing an experienced and persuasive expert and to provide them with enough time to prepare a coherent and thorough report.

The result in this case does not shut the door on an A1P1 argument completely but has outlined the challenges in proving its application. It seems it may apply to similar cases, however claimants must be capable of establishing the existence and value of adherent goodwill as an asset.

Goodwill, adherent or otherwise, has always been difficult to define and there are multiple approaches that may be taken which add layers of complexity.

Claimants should consider seeking legal advice at the earliest opportunity to assess the viability of this line of defence in accordance with the particular facts before embarking on costly litigation.

Idris Ajao, an apprentice solicitor at Osborne Clarke, contributed to this Insight.