Property Law – Fancy a break … there’s an appealing concept!

By : Stephen Lennard

In most civil cases the judge at trial has to determine what has happened in the past. Conversely in applications for renewal of a lease under the Landlord and Tenant Act 1954 the court must decide what terms should govern the future. This may explain a greater readiness to admit evidence of post-trial events on appeals in such cases.

The range of potential disputes between landlord and tenant in such applications is of course broad. Most commonly the focus in cases which reach trial is on whether the statutory ground of opposition is made out, thereby relieving the landlord of that particular tenant and leaving open to the landlord all options for dealing with the property. Also frequently encountered is the scenario where there is only one term of the tenancy left to be resolved by the court, the principle of a new lease having been conceded and its other terms having already been agreed. Typically this will be the issue of rent determined by the court on the expert valuation evidence presented to it.

The Act at sections 32 to 35 deals with the terms of the new tenancy under the headings of the premises, the duration, the rent and other terms. Usually, but by no means universally, the terms replicate those in the lease which is being renewed. What can often prompt a dispute is when either party wishes to introduce a new term that had not figured in the original agreement. This can be at the instance and for the ostensible benefit of either landlord or tenant. Take for example a break clause. The tenant may feel much happier and more relaxed about the prospect of a 15 year lease at a rent which he may only just be able to afford if he has the chance to quit after 5 years. This will be of particular importance to new and small businesses. The landlord on the other hand may have formulated future plans for redevelopment of the site which he was unable or unwilling to deploy in order to oppose the grant of any new lease at all; unable – for example because he had not at that stage acquired the necessary adjoining parcels to make the development a viable reality – or unwilling – because the tenant may provide a strong covenant and he does not wish to jeopardise his income flow.

Whether or not a redevelopment break clause should be ordered when it cannot be agreed, when it should be exercisable and on what terms are questions which can cause some real difficulty. Such a dispute engages these two key principles – a) it is no part of the policy of the 1954 Act to give security of tenure to a business tenant at the expense of preventing redevelopment [Adams v Green [1978] 2 EGLR 46] and b) the need to give a tenant a reasonable degree of security of tenure [see eg JH Edwards & Sons Ltd v Central London Estates Ltd [1984] 2 EGLR 103 and Amika Motors Ltd v Colebrook holdings Ltd [1981] 2 EGLR 62.]

A recent case heard by Mr Justice Lewison grappled with the tensions between these competing positions – as he succinctly put it, the balance having to be struck between the redevelopment aspirations of the landlord against the business interests of the tenant : Davys of London Wine Merchants Limited v City of London Corporation and Saxon Land BV [2004] EWHC 2224 (Ch) [2004] 49 EG 136 in which he delivered judgment on 6 October 2004. The tenant operated a wine bar in the City – those more alert readers among you may at this point have worked that one out for yourselves from the title of the action – under a 25 year lease expiring in 2002. There was no opposition to a new tenancy as such but on the basis of evidence of a commitment to sell the property to a developer who would assemble in the future a substantial site for development which could not be carried out with the wine bar continuing to trade, the county court judge ordered the grant of a new 14 year tenancy with a rolling redevelopment break clause exercisable on 11 months notice after the first 5 years of the term.

Neither side was happy and both appealed. Before the appeal the Corporation sold the land to the second defendant who applied to be joined to the proceedings and for permission to adduce new evidence. This application was granted (and reported in our newsletter in July this year – Vol 6 part 3 & 4) with some interesting observations – the test being whether a refusal to admit would be an affront to justice – from the Vice Chancellor on the principles to be applied. While the new evidence was to be permitted, the issue of its relevance was to be reserved to the hearing of the appeal. The claimant then abandoned its appeal but the defendants’ appeals were pursued.

An initial issue arose whether in considering the imposition of a break clause the court was exercising a discretion under s35 of the Act – other terms of the new tenancy – or s33 the duration of the new tenancy. This may be significant because the former requires the court in reaching a decision to have regard to the terms of the current tenancy, while the latter does not and leaves the question of reasonableness at large. In a nicely understated phrase when unassisted by the authorities the judge expressed the opinion that “the cases do not speak with one voice” but in the event he declined to make a finding on the point. Having determined that the trial judge had applied the correct test to the facts he found, “although he may have been at the borders of his discretion in selecting the period of five years, he did not exceed it” and the appeal (without reference to the new evidence) was rejected.

Mr Justice Lewison then heard the new evidence himself – rather than remit it to the county court – and concluded that on the facts the break clause should be exercisable on eleven months notice which could not be served prior to July 2007 – in effect, taking away from the tenant some eighteen months of security of tenure and allowing the appeal to that extent. Perhaps unsurprisingly the new evidence – which related to a substantial shift in strategy by the second defendant concerning its proposals for the development of the actual site and adjacent sites – was held to be relevant. In fact it was determinative of the decision to allow the appeal notwithstanding the judge’s finding that the basis of the defendants’ application previously put before the Vice Chancellor for permission to call the new evidence was false. The judge commented that had the court been aware of the true position “it is highly questionable whether he would have permitted the fresh evidence to be admitted.” He felt compelled to resist the temptation to dismiss the appeal on that basis alone – “once the decision to admit the fresh evidence has been taken, the appeal court must consider it.” On that point alone, quite apart from being able to accelerate the development project by eighteen months, the landlord had considerable cause for celebration. It is to be hoped that, whilst no doubt in the interests of good tenant relations, if not just supporting its tenant’s ability to pay the rent, it did so at enormous expense in the very wine bar that was the subject matter of the dispute.