What happens when the landlord wants to include an early break right in a lease renewal in order to redevelop but the tenant refuses? How does the court decide?
We take a look at the recent case of B&M Retail Limited v HSBC Bank Pension Trust (UK) Limited.
At the time of the hearing HSBC Bank Pension Trust (UK) Limited was the landlord to B&M Retail Limited pursuant to a 20-year lease dated 20 December 2000. The lease was protected by the security of tenure provisions contained in the Landlord and Tenant Act 1954.
On 25 January 2021, B&M served a notice pursuant to section 26 of the 1954 Act. HSBC erroneously served a section 25 notice on 5 May 2021 opposing a new tenancy based the ground of redevelopment - ground f of the 1954 Act. However, it was later agreed that HSBC's notice was not a valid counter notice and was out of time, so they lost the opportunity to oppose the renewal.
The claim therefore proceeded as an unopposed lease renewal with the parties arguing over the terms of the new lease.
Whilst the length of the term was disputed the key issues before the court were firstly whether HSBC should be entitled to a break right and secondly, how early in the term should that right be exercisable.
Whether the new lease should include a break right
The court said that “the weight of authority demonstrates that a landlord should not be prevented from pursuing its redevelopment plan albeit that there are circumstances where a court can conclude that it would be reasonable in all the circumstances to delay the operation of a break clause drafted for this purpose.” The court was unpersuaded by B&M’s submission that the tenant’s need for security should always trump the intention of the landlord to enter into redevelopment.
The court’s analysis of the case law concerning redevelopment break rights highlights the fact that, whilst there is still a balancing act between the competing interests of the landlord and tenant, the “court will only upset a landlord’s redevelopment ambitions if there is a major factor which points the other way”. Arguably that is a very high bar therefore for tenants to meet if they wish to persuade a court to refuse a break right where the landlord can demonstrate a “real possibility” of the need for redevelopment. Indeed, the court went on to say that whilst it recognised the consequences of the break right were harsh and that it may result in financial loss for B&M, that was not an “overriding consideration”.
Based primarily on the expert evidence the court was persuaded that there was a “real possibility” that HSBC would obtain planning permission to redevelop and therefore found in favour of the landlord as to the inclusion of the break right.
The date of the break right
Turning to the second key issue namely the timing of the break right, B&M sought a break right only exercisable from the fifth anniversary of the new lease in order to give it business continuity. HSBC, on the other hand, sought a break right operable on no less than 6 months’ notice so that it could proceed with its redevelopment and lease to Aldi.
The court took account of the agreement for lease HSBC had entered into with Aldi in 2021. Pursuant to that agreement Aldi would carry out re-development works and take on a lease for 20 years for the unit, subject to HSBC giving Aldi vacant possession by 25 February 2025. The court heard evidence about the deal with Aldi but particularly, the higher rent that Aldi were prepared to pay for the redeveloped unit, as well as the longer lease term they were prepared to accept.
The court decided that the substantial prejudice to HSBC’s redevelopment plans, the potential loss of the advantageous deal with Aldi (i.e. the length of lease and increased rent) and the loss of substantial profit trumped B&M’s position. As a result, the court ordered a 5-year term but allowed HSBC’s redevelopment break right to be operable immediately.
Interestingly, whilst the court recognised the jobs that may be lost at B&M and the fact that Aldi is a competitor of B&M, it said that the 1954 Act should not operate as an “anti-competitive device”.
It is worth remembering that the inclusion of the break right is not necessarily the end of the matter - HSBC is not entitled to possession immediately but only to operate its break right immediately. The new lease will be inside the 1954 Act so, subject to any agreement with B&M, HSBC will still need to give notice under section 25 of the 1954 Act specifying ground (f) of section 30(1) of the 1954 Act and prove that ground of opposition at trial. That could of course take many months to progress through the court.
The court’s decision to allow the landlord’s break right is not hugely surprising – the bar for showing that redevelopment is a “real possibility” is not a particularly high one. What is perhaps more surprising, though not without precedent, is the fact that the court allowed the break right to be exercisable so soon into the term i.e. immediately. This will should give those landlords who have with the right supporting evidence the confidence to pursue early break rights.
The 1954 Act is a protection tool for tenants in business occupation; but that protection is not unfettered. This case shows that courts will grant a landlord an immediate break right even if it causes the tenant hardship. The case also helpfully shows the kind of evidence that both parties in that position need to put forward and the strategic steps landlords (and indeed tenants) can take to either succeed at court – or better still, try and achieve a good, negotiated outcome.
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Tim Rayner is a Partner and Joint National Head of Real Estate Disputes and Stacey Moore is a solicitor.