Can a landlord easily remove a commercial tenant from its property to carry out a redevelopment?
When a landlord is considering redeveloping a commercial property, it has to consider whether it will be able to remove its commercial tenants in order to carry out the redevelopment. The Landlord and Tenant Act 1954 (LTA 1954) offers protection to tenants and restricts the circumstances in which a landlord can take back possession of its property.
The tenant's and landlord's rights
Unless a commercial lease is "contracted out" of the Landlord and Tenant Act 1954 (LTA 1954) the tenant will have a statutory right to renew their tenancy (subject to meeting certain criteria set out in the LTA 1954).
In circumstances where the landlord does not wish to renew the tenancy he can oppose the renewal on certain limited grounds which are set out in Section 30 of the LTA 1954.
Where the landlord wishes to redevelop the property, he needs to prove his intention to redevelop (relying on Section 30, ground (f)). The redevelopment works must be substantial and involve either demolition and reconstruction or substantial works of construction which could not reasonably be done without obtaining possession of the property occupied by the tenant.
The landlord must serve an opposed Section 25 notice and specify the ground/s upon which he relies. The timing of this notice needs to be carefully considered. The landlord must give between 6 and 12 months' notice to the tenant and the termination date cannot be earlier than the contractual expiry date. The landlord will want to balance obtaining vacant possession and protecting its income stream. Where there are multiple tenants, careful consideration must be given as to the timing of all notices.
The tenant may choose to leave by the date specified in the notice, in which case statutory compensation is payable to the tenant. This is calculated with reference to the rateable value of the property and can be substantial. The landlord needs to factor this in to the development budget.
If the tenant does not want to vacate, it must issue proceedings for a new lease before the termination date stipulated in the notice. Failure to do so will result in the tenant losing its protection under the LTA 1954. It is also open to the landlord to issue termination proceedings.
Once a claim is commenced and the defence filed, the parties must file evidence as directed by the Court. The directions will generally include disclosure (the gathering and exchange of evidence on both sides), witness statements and expert evidence (if appropriate). The case will usually be listed for trial once these steps have been completed.
If the proceedings go all the way to trial, the process can take some time (around 9 to 12 months, possibly longer) which the landlord must bear in mind when considering his redevelopment schedule.
Proving the landlord's intention to redevelop
The first part of the test is whether the landlord has a firm and settled intention. This is a subjective test and the Court will consider the landlord's state of mind.
The second part of the test is an objective assessment of whether there is a realistic prospect of implementing the intention. So, if there are too many hurdles to overcome before the development can begin, the landlord will not be able to prove it has a reasonable prospect of achieving the intention.
The landlord therefore needs to gather evidence in order to prove his intention to redevelop and should work towards getting all the necessary paperwork in place to have the best chance of succeeding. The individual facts of each case will need to be considered but generally, the landlord will need to have the following: planning permission (or at least have taken steps towards obtaining it), plans/drawings for the redevelopment, securing finance to fund it, obtaining Board approval (as appropriate); appointing professional advisors/contractors and ensuring vacant possession of the entire site is achieved or in hand.
The landlord need not have all of this evidence by the time of the trial, for example, he may not have obtained planning permission, but he will need to prove that he has a reasonable prospect of obtaining it within a certain timeframe.
When the landlord must prove his intention
The landlord must prove his intention at the date of the Court trial so he has (generally) a considerable time to gather the evidence in this regard and does not need to prove his intention at the point of serving the S25 notice. Having said this, strategically it is generally sensible for the landlord to disclose as much information as early as possible to prove his intention as an incentive for the tenant to settle as early as possible and save costs. The tenant however may hold out if they do not believe that the landlord will be able to prove their intention at the date of the trial.
When will the landlord get vacant possession?
If the landlord has all the evidence in place, he should be successful in proving his intention to redevelop and the Court will order that the tenancy is terminated. The landlord will obtain vacant possession of the property 3 months and 21 days after the date of the order (subject to there being no appeal). The landlord must then commence the redevelopment works within a reasonable period thereafter.
Recent case law
In the case of S Frances Limited v the Cavendish Hotel (London) Ltd (2017) the Court held that it was immaterial that the landlord's proposed works were only being carried out so that the landlord could get rid of the tenant and get the property back, as long as it had the intention to do the works. It did not matter that the works made little commercial or practical sense as long as the landlord intended to do those works. The Court made the point that the test is in respect of intention and the landlord's motive is irrelevant.
This case is being appealed as the tenant argued that this undermined the objective of the LTA 1954 of granting business tenants security of tenure. It is quite controversial as it makes it easier for a landlord to design a scheme in such a way that it can get the tenant out. We will need to watch this space for the appeal decision.
This article was first published in November's Property Investor News.