The eagerly awaited decision of the Supreme Court in S Franses Limited v The Cavendish Hotel (London) Ltd brings a significant change to a landlord's ability to use ground (f) under the Landlord and Tenant Act 1954 (redevelopment) to oppose the grant of a new tenancy.

The decision will have commercial consequences for both landlords and tenants alike - although it appears to be more tenant-friendly due to the additional obligations now imposed upon landlords.

Summary

As is now well-known, this appeal case concerned a landlord who opposed its tenant's request for a new tenancy under ground (f): the intention to demolish or reconstruct a substantial part of the premises or the intention to carry out substantial work to the premises that could not be reasonably done without the landlord obtaining possession.

The landlord stated that it intended to carry out works on the termination of the current tenancy and gave an undertaking to the Court that the works would be carried out if possession were granted. However, unusually, the landlord also made it clear that if the tenant were to leave voluntarily, it had no intention to carry out the works as it would not benefit from the reconstruction. Indeed, the landlord was intending to carry out the works purely to obtain vacant possession.

The Supreme Court held that:

  1. To succeed under ground(f),the landlord's requisite intention to carry out substantial works to the premises must not be conditional upon the tenant vacating the premises – the intention must be "fixed and settled";
  2. Although motive remains largely irrelevant to ground (f), it is a useful tool to test whether the requisite landlord's intention in carrying out the works exists – in this case, the landlord's motivation to gain vacant possession indicated that its intention was conditional and would not be there if the tenant vacated voluntarily. This was referred to as the 'acid test'.

Pre S Franses

Before this case, it was traditional for the landlord to show that:

  • It has a firm and settled intention to demolish or reconstruct the premises or a substantial part of it or carry out substantial work of construction; and
  • It has a reasonable prospect of achieving that intention.

There was no obligation to prove that it would do so regardless of the tenant's claim for a lease renewal.

Post S Franses

The introduction of the acid test means that there is an additional evidential hurdle for the landlord to jump when proving it has the intention to carry out the works.

The acid test introduces a requirement for the landlord to prove that it would carry out the same proposed works even if the tenant left the premises voluntarily. This intention must exist independently of the tenant's statutory right to a new tenancy.

What does this decision mean for landlords?

This decision creates a higher threshold for landlords to overcome when relying on ground (f) to oppose the grant of a new tenancy:

  • Opposing a new tenancy under ground (f) may become more costly and lengthy. Tenants may be more likely to push for early disclosure and fight the whole way to trial so that the landlord's intention is truly tested, rather than settle and voluntarily give up possession earlier;
  • Ground (f) cases will be more complex as Courts may expect more extensive evidence of intention to carry out works. Landlords who have a genuine intention to demolish or reconstruct the premises must now be prepared to have their works proposals heavily scrutinised in Court. Cross-examination is likely and, for those landlords who have firm plans to carry out the work, it might help demonstrate the unconditional nature of the works by obtaining planning permission pre-trial.
  • Traditionally, landlords could produce multiple schemes of works throughout the course of proceedings in order to strengthen their ground (f) position. Now, landlords are likely to only succeed where they have produced one particularly strong scheme of works. In addition, only the works that are unconditionally intended will be considered in relation to a tenant's claim for a renewal tenancy. Elements of the scheme that are conditional upon whether the tenant goes voluntarily or not will not be considered by the Court.
  • Undertakings as a whole may no longer satisfy the Court that the landlord has the requisite intention to carry out the works (unless supporting the right type of (unconditional) intention).

The decision may also impact on other cases where intention is important, for example, where a landlord intends to occupy the holding and relies on ground (g) to oppose the grant of a new lease.

What does this decision mean for tenants?

This decision is clearly a "win" for tenants however it is not without its downsides in the long term:

  • Whilst it may potentially become more costly for the landlord to establish ground (f), the additional work that must be undertaken in the lead up to trial will also be incurred by the tenant. For example, the tenant may want to engage its own expert to examine the landlord's proposed works and the varying ways the works can be carried out, to ascertain whether they can take place without the need for vacant possession. It is worth noting however that the facts of this case are slightly unusual – the landlord made no effort to hide that it was carrying out the works purely to obtain vacant possession. Other landlords may be able to conceal their true intention, therefore arbitrarily driving up the costs of litigation for the tenant if it fails to succeed in a claim for a renewal lease
  • Now that landlords may find it harder to rely on ground (f), they might be more likely to offer contracted out tenancies to be more certain of getting rid of tenants at the end of the term
  • Otherwise, landlords may try to seek higher rents from tenants when granting protected tenancies within the Landlord and Tenant Act 1954, to take into account a possible heightened risk of not being able to rely on ground (f) at the end of the term.

However there are positives:

  • Previously, tenants were likely to vacate once a landlord cited ground (f) as its reason for opposition, not thinking it worth expending time and money on seeking to disprove the alleged intention. A landlord's motive (and the reasonableness of their intention) and lack of utility of works can now however be investigated as evidence of not only the genuineness but the conditional character of the landlord's intention. Tenants may therefore have more chance to disprove a landlord's intention under ground (f), and so succeed in being granted a new tenancy.