Lawbite: Ground (f) redevelopment: when “later” is too late

The High Court has upheld a County Court decision from last year in which a landlord had failed to oppose its tenant’s lease renewal under section 30(1)(f) of the Landlord and Tenant Act 1954 (the “Act”) (“Ground (f)”).

In dismissing the landlord’s appeal, the High Court provided important guidance on the correct approach when assessing what is a “reasonable time” by which the landlord must have commenced works on termination of the tenancy under Ground (f). In doing so, it indicated that the landlord’s opposition would have also failed on that basis.

This judgment is relevant to landlords and tenants of business premises in England and Wales where lease renewals under the Act are opposed on redevelopment grounds, particularly where issues of funding and timing arise.

For discussion of the County Court’s decision at first instance, see our previous article “Landlord’s Ground (f) opposition narrowly defeated”.

The background

In these Ground (f) proceedings, the issue was whether Pridewell Properties (London) Limited (the “Landlord”) could establish the requisite intention to redevelop a public house, involving new residential accommodation above and the construction of mews houses on part of the existing beer garden. If it could, then the Court would not grant Spirit Pub Company (Managed) Limited’s (the “Tenant”) a renewal lease.

County Court’s decision

The matter came before the County Court which, when assessing intention, had to consider whether the Landlord had a real prospect of:

1. obtaining planning permission;
2. overcoming the impact of a potentially enforceable restrictive covenant;
3. commencing the proposed works on the termination of the current tenancy; and
4. securing funding for the redevelopment.

At first instance, the County Court accepted that the Landlord had a genuine and settled intention to redevelop and that the works could not reasonably be carried out without possession. It also found a real prospect of overcoming planning and restrictive covenant hurdles (points 1 and 2).

As to timing, the County Court held that, although works could not begin immediately on possession, a delay of 10 to 14 months was in all the circumstances a reasonable time, given the need to undertake surveys which could not have been carried out while the Tenant remained in occupation but which were required in order to obtain planning permission. It concluded that works commencing within that period could still be treated as being carried out “on the termination of the current tenancy” for the purposes of Ground (f) (point 3).

However, the Landlord’s opposition failed because it had not demonstrated a real prospect of obtaining funding (point 4). Lenders required personal guarantees from the Landlord’s directors and no evidence was provided that such guarantees could be supported. That evidential deficiency alone was sufficient to defeat reliance on Ground (f).

The appeal

The Landlord appealed solely on the funding point (point 4) and the Tenant cross-appealed, renewing the remaining three issues by way of a Respondent’s Notice.

The Landlord argued that the County Court had been wrong to require evidence that its directors could support personal guarantees. The High Court rejected that argument, concluding that funding must be assessed as a whole, including conditions lenders would realistically impose. Where the evidence showed that guarantees were standard for lending to an SPV, the absence of evidence as to the directors’ ability to provide them was a legitimate basis for concluding that funding rested on speculation rather than a real prospect.

Timing

Although unnecessary to decide the appeal, the High Court went on to consider the Tenant’s cross-appeal on timing, and in doing so gave important guidance on the correct approach to the “reasonable time” requirement under Ground (f). The High Court’s conclusions on what is a “reasonable time” by which the Landlord must have commenced works on termination of the tenancy under Ground (f) are perhaps the most interesting and significant elements of the decision.

The Act requires that the landlord must demonstrate that it has the intention to do the requisite works “on the termination of the current tenancy”. Through case law, the phrase has been employed that the landlord has to intend to start the works within “a reasonable time” of the end of the lease.

The Court agreed with the Tenant that the County Court had asked the wrong question when it concluded that works commencing 10 to 14 months after possession could satisfy Ground (f). The correct question is not whether such a delay is reasonable or justified in the circumstances of the steps that need to be concluded before the work commences, but whether, given the likelihood of that delay, the Landlord could properly be said to intend to carry out the works on the termination of the current tenancy.

Where a landlord knows that it cannot set about the works upon obtaining possession because significant further steps must first be taken it is unlikely to be found to have the requisite intention to redevelop on termination of the tenancy for the purposes of the Act. Those further steps could include undertaking surveys, engaging in pre application discussions, and submitting and pursuing a contentious planning application.

On the facts, the Landlord accepted that it would not be in a position to apply for planning permission until several months after possession and that works could not begin for up to 14 months thereafter.

The High Court indicated that, had it been necessary to decide the point, the timings point would have defeated reliance on Ground (f) in any event.

Key takeaways

• The judgment provides clarification of what is meant by works being carried out “on the termination of the current tenancy”. The question is not whether a post-termination delay is reasonable or explicable, but whether the landlord can truly be said to intend to set about the works at that time. A substantial post termination delay, even if explicable, is therefore likely to be insufficient.
• Previous authorities demonstrate that only limited leeway is permitted after termination. While literal compliance is not required, the tolerance has been confined to relatively short periods, sometimes only a matter of months. What constitutes a “reasonable time” remains highly fact and property specific.
• Some of the more recent authorities had indicated that a period of 12 months was acceptable. However, the decision in this case will make landlords less confident about delays of more than a few months.
• The High Court endorsed the principle that a short period after possession may be allowed for practical preliminaries, such as securing and clearing the property, mobilising contractors and taking initial preparatory steps, before works begin. The permissible length of that period will depend on the size, condition and nature of the holding and the scale of the proposed work.
• Where a landlord knows that there will be a substantial period between regaining possession and the commencement of  works, e.g. because it needs to do something else first,  the redevelopment may instead need to be pursued through shorter renewal terms or redevelopment break options, both of which can be sought under the framework of the Act.
• Landlords may have to decide whether to commit, potentially speculatively, to reaching a very advanced stage of preparedness to start works (planning etc) in order to meet the test.
• The judgment highlights the importance of access rights during the tenancy. Where a landlord lacks sufficient rights to carry out surveys, investigations or other preparatory inspections prior to termination, this may push key steps beyond lease expiry and undermine reliance on Ground (f). Careful lease drafting is therefore critical where redevelopment may be contemplated in the future.
• Even where a landlord establishes a genuine and settled intention to redevelop and overcomes planning and title-related hurdles, a single evidential failure on funding can be sufficient to defeat reliance on Ground (f) in its entirety.