I work closely with my commercial property colleagues on lease renewals under the Landlord and Tenant Act 1954 (the Act). We act for both landlords and tenants of commercial property in the southwest and nationally.
When acting for commercial tenants, increasingly we are seeing landlords, their agents or solicitors trying to impose terms within that new lease which are a significant departure to the terms of the original lease.
The Act provides tenants of commercial property with the right to expect to renew their lease at the end of the term, unless they themselves have behaved poorly as a tenant, or through no fault of their own, the landlord requires the property back to occupy themselves; to redevelop; or to demolish. In the latter ‘no fault’ scenarios, the tenant will be financially compensated by the landlord if they are not granted a new lease.
It is true that the commercial property market has changed over the decades and what may have once been attractive to a landlord or tenant twenty years ago, may not be attractive today. Leases written today, for example, will often include environmental or ‘green energy’ provisions, which were not even a consideration when the original lease was granted. There has been a shift from longer terms e.g. 15 or 20 years, to lesser 5-year terms, or 10 years with a 5-year break, offering both parties more flexibility, should their needs or positions change.
The Act allows the parties to a renewal lease to negotiate fresh or alternative terms in the new lease. However, if the parties cannot agree, Section 35 provides the Court with an unfettered discretion to determine terms of the lease other than rent. In determining those terms ‘the Court shall have regard to the terms of the current tenancy and to all relevant circumstances’.
The leading case is O’May v City of London Real Property Limited [1983]. Lord Wilberforce described the ‘having regard to’ the existing lease provisions as being “elastic: they compel something between an obligation to reproduce existing terms, and an unfettered right to substitute others. They impose an onus upon a party seeking to introduce new, or substituted, or modified terms, to justify the change, with reasons appearing sufficient to the Court”.
In summary, it is said that:
(1) The Court must first consider the terms of the existing lease;
(2) The burden on persuading the court to impose a change rests upon the party proposing the change;
(3) The change must be fair and reasonable;
(4) There must be a good reason, based upon fairness, to impose the proposed new term;
(5) Otherwise, the discretion is wide; and
(6) The Act is not intended to “petrify” the terms of the existing tenancy; the existing term may be outdated or unsuitable now and change can be justified.
It is not uncommon for landlords or tenants to look to negotiate changes to commercial leases when they come up for renewal. If changes are agreed, all well and good. If changes cannot be agreed, then it is available to either party to apply to the Court for the Court to determine if the change meets the thresholds described above. Often claims will be issued but are then settled before they get to trial. As a result, there are very few reported cases on lease renewals and the application by the Court of Section 35.
The recent case of Kwik-Fit properties Limited v Reshem Limited [2024] serves to reinforce that the Court when deciding upon changes to lease terms must be persuaded that there is a good reason for imposing the new term. In this case Kwik-Fit had originally been granted a 25 year lease of premises in 1996. There was no break clause in the original lease.
Amongst other issues, the Court was asked by Kwik-Fit to impose a break clause in the renewal lease, exercisable every 5 years but by the tenant-only. It had been agreed that the lease term would be 15 years. The landlord, Resham Limited, opposed the insertion of tenant only breaks every 5 years in the renewal lease.
The Court heard from Kwik-Fit on their internal ‘policy’ when negotiating renewal or new leases; the industry and the market generally. The Judge rejected Kwik-Fit’s submission that tenants in tyre and exhaust servicing will only entertain terms of 5-year multiples with 5 year tenant only breaks. Their evidence and that of the market did not support that submission. The Judge further found that in these particular premises, the tenant could not establish that there was a real possibility of needing to terminate the lease because of the premises becoming unsuitable for carrying out its business. The Judge noted that the tenant could have agreed a shorter lease than 15 years or with mutual break clauses, exercisable by the landlord or the tenant, but they had declined to agree such provisions. The tenant desired the longer term, but didn’t want the landlord having the opportunity to break the lease as well.
Considering all of the relevant factors, the Judge concluded here that it was not fair and reasonable to include a tenant’s break clause. The new lease would therefore be for 15 years without a break.
I find the Judgment in this case welcoming, and a reminder that there is a significant threshold to be met by a party seeking to impose changes in a renewal lease. It cannot be taken for granted that just because the parties negotiating a new lease now might agree something very different to what was agreed 10, 15 or 20 years ago, that is not to say that the changes will be imposed without careful consideration to fairness and reasonableness. The prevailing market of itself does not dictate or justify wholescale changes. The case also reinforces that if the Court can be persuaded of the appropriateness of the change, and that it is fair and reasonable, they will not “petrify” the existing lease terms for the sake of it: there is discretion and flexibility where the change can be made out.
Written by Helen Williams. Helen is a Partner and leads the Property Disputes Team at Porter Dodson. If you feel that you would benefit from advice on this topic, please feel free to get in touch below.