The case was seen as being a real test of the 54 Act and the power that a landlord has to implement ‘ground f’ to defeat a tenant in its right to renew at lease end, in order to obtain possession of its unit to allow for a change of use. The judgement, which was made in December 2018, ruled in favour of the tenant and is likely to have a far-reaching impact on commercial leases, as well as potentially acting as a blocker for much needed redevelopment of retail and leisure spaces in particular.
The case involved the Cavendish Hotel in London and its tenant, S Franses Limited, a tapestry dealership and gallery that occupied a ground floor and basement space within the hotel complex. With its lease of the premises ending in 2015, Franses opted to trigger its right to renew, which Cavendish Hotel contested in order that it could get the unit back and include it in a major renovation of its ground floor space. The tenant, not wanting to lose its prime central London spot behind Fortnum & Mason objected and a long running legal feud ensued.
I have been involved in many 54 Act disputes and more often than not they can be settled before the legal process has become too costly. Even most of the disputes that do make it to having a court date set, usually end with an out of court settlement before a judge is seated. This case, however, went through three separate hearings. The tenant was adamant that the proposed works were only being undertaken to evict them; the landlord contending that its scheme of works was significant enough that its intention for the space on vacant possession didn’t matter.
In the end it was likely the landlord’s stance that it would probably not have carried out the full extent of the works had the tenant voluntarily left, that saw the judgement rule in the tenant’s favour. In my role as an independent building surveying expert, I assessed the proposed works and reported it to be a scheme which fell within ground f, in that all proposed works stood up to scrutiny as there being a viable need. Essentially, all the works could reasonably be seen as being necessary as part of the proposed plans. The tenant however seized on the admission that the works would have been different had they left voluntarily, arguing that, justifiable or not, they were created just to defeat the application for a new lease.
What this all means
The upholding of this appeal from the tenant is going to change the landscape of contested lease renewals beyond recognition. At a time where high streets are changing rapidly and those owning commercial property, especially retail and leisure spaces, are having to be flexible, there is a real need for landlords to be able to have the ability to make drastic changes to their properties. This ruling will mean that a whole raft of additional experts could be needed to try to prove that proposed works are genuine and necessary.
Landlords don’t take decisions to redevelop lightly, they do so to improve customer experience and to add value. Often changing an outmoded retail scheme into a leisure destination can revitalise an area, creating much needed employment opportunities. Any further barriers to that ability may stop creative and innovative developers from bringing forward schemes that are re-shaping the role that real estate plays in our towns and cities.
In all likelihood, it will become so expensive and challenging to prove the works pass a whole load of additional tests that changing the profile of an outmoded scheme, in an opposed lease renewal, could become commercially unviable. This is going to hinder the revival of high streets up and down the country.
Landlords have been slowly losing any power they had, the high street is in meltdown, covenant strength is regularly being proved to be irrelevant, with ever increasing insolvencies. If landlords genuinely need to re-shape their properties to allow their future survival, they should be entitled to use their statutory rights to do so. Equally though, a tenant should be entitled to defend that. One thing this judgment does is make it harder for a landlord to make long term strategic plans to re-profile their building to future proof its commercially viability.
For anything other than situations where there is a solid covenant in place, I can see it becoming normal now for landlords to remove the right to renew from commercial leases in order to avoid the possibility of contested lease renewals. This will remove the long-term certainty and security that tenants currently have, especially with lease lengths shortening all the time.
Landlords should not be put off from considering the use of ground f to take possession of a unit, but they will need to have tremendous patience and will have to start planning ahead much more than in the past. I can see the process changing from starting six months prior to lease end, to up to 24 months before. They will also need to think very carefully about their proposed works, the need and the importance of consistency between what would be undertaken following a contested lease renewal and voluntary procession.