S Franses Ltd (Appellant) v The Cavendish Hotel (London) Ltd (Respondent) [2018] UKSC 62 On appeal from: [2017] EWHC 1670 (QB)

Business tenants have the protection of security of tenure. When their business tenancy ends they are generally entitled to a protected renewal tenancy at an open market rent. However a landlord can oppose a renewal tenancy if it intends to substantially demolish or reconstruct the premises occupied by the tenant. The question which was leapfrogged from the High Court to the Supreme Court was whether it is open to the landlord to oppose the grant of a renewal tenancy (under section 30(1)(f) of the Landlord and Tenant Act 1954) if the works which the landlord says he intends to carry out would have no proper purpose other than to rid the landlord of the tenant and would not be undertaken at all if the tenant were to leave voluntarily.

This case concerned the ground floor and basement of 80 Jermyn Street, St James’s in central London. The tenant is S Franses, a textile dealership and consultancy, specialising in antique tapestries and textiles. It occupies the ground floor and basement as a retail art gallery, showroom and archive. The rest of the building is occupied and managed by the landlord as the Cavendish Hotel. In March 2015, S Franses served statutory notices requesting a new tenancy. In May 2015, Cavendish Hotel served a statutory counter- notice opposing the grant of a new tenancy on the grounds of substantial reconstruction. Cavendish Hotel’s scheme of works included the lowering of part of the basement floor slab, in a way which the Court concluded would achieve nothing other than the creation of an impractical stepped floor in one of the retail units; the repositioning of smoke vents for no reason; and the demolition of an internal wall at ground floor level followed by its immediate replacement with a similar wall in the same place. It would be impossible to make any use of the retail units without planning permission for change of use, which Cavendish Hotel did not intend to seek. In addition, one of the two retail units that would be created would also be unusable having no entrance from the street. Nevertheless, Cavendish Hotel provided a written undertaking to the Court to carry out the works costing approximately £800,000 if the renewal tenancy was refused. Cavendish Hotel in evidence acknowledged that the sole purpose of the substantial building works was to obtain from the Court a refusal of the renewal tenancy and vacant possession from S Franses and that the works were “designed purely for the purpose of satisfying” the ground.

The County Court and High Court had both held that the Cavendish Hotel had proven at the date of the trial (i) that it had a genuine intention to carry out works; and (ii) that it would practically be able to do so, it was entitled to possession of the property under section 30(1)(f) and the refusal of a renewal tenancy. The motive of Cavendish Hotel was (in accordance with previous decisions) irrelevant.

However, in the rather extreme circumstances of this case the Supreme Court last month held that the landlord’s intention to carry out the works cannot be conditional on whether the tenant chooses to assert his claim to a new tenancy and to persist in that claim. Rather, the test is whether the landlord would intend to do the same works if the tenant left voluntarily. A conditional intention is not the fixed and settled intention that the ground of opposition under the Landlord and Tenant Act 1954 requires. Therefore Cavendish Hotel is not entitled to oppose the renewal and obtain possession of S Franses’ premises. S Franses is entitled to a renewal lease.

Lord Sumption also commented on a case where the landlord intended to carry out works unconditionally but these works were not substantial or disruptive enough to obtain possession from the tenant and so the landlord then artificially expands the scheme of works. In that case the test is whether at the time of the trial, were the tenant hypothetically to leave voluntarily, the landlord would not carry out the additional works, then the tenant’s claim to a renewal tenancy would fall to be resolved by reference only to the works which the landlord unconditionally intended.

It may be wise for landlords and their surveyors to disclose the intended works only when they have actually decided on their final plans for the works, otherwise they are at risk that the tenant could attempt to assert that their earlier schemes of lesser works were the works they would have carried out unconditionally and any additional works are just artificial as they would not have been carried out had the tenant left voluntarily. It is likely that some landlords will now find their redevelopment plans being more extensively examined by their tenants who might wish to test their landlord’s true intentions.

The article first appeared in our Real Estate Bulletin - Janaury 2019.