Thursday, 10 January 2019

Taking Back Control: Motive and Intention When Opposing Lease Renewal

The Supreme Court has recently ruled* against a landlord invoking “ground (f)” to oppose a tenant’s lease renewal under the Landlord and Tenant Act 1954 and held that the intention to carry out substantial works must exist independently of the tenant’s statutory claim to a new tenancy.

Unless a business lease has been contracted out of the 1954 Act, the tenant has rights to renew the lease on expiry of the contractual term.

A landlord has limited grounds under the 1954 Act to object to a tenant’s right to renew its lease. One of these grounds (known by the abbreviation “ground (f)”) is found in Section 30 (1) (f) of the 1954 Act, which provides that a landlord may oppose the grant of a new tenancy on the ground

“that on the termination of the current tenancy the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises or to carry out substantial work of construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding...”

Section 31A (which was inserted by the Law of Property Act 1969, section 7(1)), provides:

“(1) Where the landlord opposes an application under section 24(1) of this Act on the ground specified in paragraph (f) of section 30(1) of this Act … the court shall not hold that the landlord could not reasonably carry out the demolition, reconstruction or work of construction intended without obtaining possession of the holding if –

(a) the tenant agrees to the inclusion in the terms of the new tenancy of terms giving the landlord access and other facilities for carrying out the work intended and, given that access and those facilities, the landlord could reasonably carry out the work without obtaining possession of the holding and without interfering to a substantial extent or for a substantial time with the use of the holding for the purposes of the business carried on by the tenant; or

(b) the tenant is willing to accept a tenancy of an economically separable part of the holding and either paragraph (a) of this section is satisfied with respect to that part or possession of the remainder of the holding would be reasonably sufficient to enable the landlord to carry out the intended work.”

There have been many cases over the years examining the extent of the works required to satisfy the ground (f) test; on what “intends” means in this context; whether the landlord’s motive for doing the works is relevant; and the point in the process when that intention should be assessed.

This case focusses on the landlord’s intention and motive when asserting its rights under ground (f).

When considering a landlord’s actions, the landlord’s intention and the motives that lie behind that intention become intertwined.

Let’s briefly look first at the outline facts of the case.

·       The landlord (itself a leaseholder) wanted to take back control of part of a building sublet to an occupier using it as an art gallery, showroom and archive.

·       The landlord proposed a scheme of works to be carried out in the sublet premises that were sufficiently disruptive that the tenant would have to move out for the landlord to carry them out (to satisfy the last part of ground (f)).

·       In accordance with a common practice in this field, the landlord gave an undertaking to the court to carry out the works if a new tenancy was refused.

·       However, crucially the landlord admitted that the works (which had been costed at nearly £780,000 plus VAT) would not be carried out if the tenant left the premises voluntarily. The landlord submitted that “the works are thoroughly intended because they are a way of obtaining possession. That is all there is to it” and that the scheme was “designed purely for the purpose of satisfying ground (f)”.

·       It was also accepted that significant parts of the works were useless. Although the works themselves required no planning permission, it would be impossible to make any use of them at all without planning permission for change of use, which the landlord did not intend to seek.

·       In other words, the landlord intended to carry out the works if they were necessary to get rid of the tenant, but it did not intend to carry them out if it were not necessary to do so for that purpose, for example if the tenant agreed to go voluntarily, or if it were found possible to be able to carry them out by exercising a right of entry without obtaining vacant possession.

The Supreme Court (in a leapfrog appeal from the High Court) reversed the decision at first instance and found in favour of the tenant, ruling that:

·       To succeed under ground (f), the landlord's intention to carry out the works cannot be conditional on whether the tenant chooses to assert its claim to a new tenancy – the intention must be "fixed and settled"; and

·       The “acid test” is whether the landlord would intend to do the same works if the tenant left the premises voluntarily.

·       On the facts, the tenant’s possession of the premises did not obstruct the landlord’s intended works and the landlord did not intend to carry them out if the tenant persuaded the court that the works could reasonably be carried out while the tenant remained in possession.

It is no longer enough for a landlord just to show that it has a firm and settled intention to carry out the works and that it has a reasonable prospect of doing so.

The “acid test” means a landlord must prove that it would carry out the same proposed works even if the tenant decided to leave the premises voluntarily. In other words, this intention must exist independently of the tenant’s right to a new tenancy and must not be conditional on the tenant deciding to assert its claim to a new tenancy.

The lead judgment given by Lord Sumption, and the supporting judgment of Lord Briggs, both contain paragraphs analysing the questions of motive and intention. I repeat some of them here to give you a flavour of how difficult it is to frame such considerations, which have nevertheless been skilfully distilled into the acid test described above.

From Lord Sumption:

“This appeal does not, as it seems to me, turn on the landlord’s motive or purpose, nor on the objective reasonableness of its proposals. It turns on the nature or quality of the intention that ground (f) requires. The entire value of the works proposed by this landlord consists in getting rid of the tenant and not in any benefit to be derived from the reconstruction itself.” [Para 17]

“Just as the landlord’s motive or purpose, although irrelevant in themselves, may be investigated at trial as evidence for the genuineness of his professed intention to carry out the works, so also they may be relevant as evidence of the conditional character of that intention. In both cases, the landlord’s motive and purpose are being examined only because inferences may be drawn from them about his real intentions.” [Para 21]

Lord Briggs addressed the fact that it is the landlord’s intention at the date of the hearing that is relevant; a principle established by prior case law. Here are some extracts from his judgment:

“By the time of the hearing these alternative intentions about what if any works the landlord will do if the tenant leaves voluntarily will usually just be past history. The tenant will by then have committed substantial costs, and risked liability for the landlord’s costs, in pursuing its claim for a new tenancy to a hard-fought hearing. The prospect of voluntary departure may have receded to a purely theoretical irrelevance, like a cloud the size of a man’s hand. In such a case the landlord may no longer have any relevant intention in relation to that hypothetical and indeed counter-factual possibility. In some cases the tenant may from the outset have manifested such a determination to seek a new tenancy at all costs that voluntary departure may never have been a sufficient possibility for the landlord to have given it a moment’s thought, still less formed an intention about it. To the question in cross examination: “does your company now intend to carry out these works if the tenant goes voluntarily”, the landlord’s witness might say, with complete honesty, as at the hearing date, that she and her fellow directors don’t waste their valuable time discussing irrelevant hypothetical possibilities.” [Para 27]

“It is to escape this forensic cul-de-sac that legitimate recourse may now have to be had to a forensic examination of the landlord’s purpose or motive, as Lord Sumption suggests.” [Para 28]

“There is nothing hypothetical or counter-factual about testing the type or quality of the landlord’s intention, as at the time of the hearing, by an analysis of the purpose or motive behind it. The disqualifying underlying purpose (just to get rid of the tenant) is a continuing aspect of the landlord’s then current intention, even if the direct question whether, in other circumstances (the tenant going voluntarily), the landlord would have intended to do the relevant works appears hypothetical and even counter-factual.” [Para 30]

“The only legitimate purpose of the examination of purpose, beyond testing the genuineness of the landlord’s intention, will be to enable the court to decide whether the landlord would have done the relevant works if the tenant had left voluntarily. This is, as Lord Sumption explains, the acid test of the type or quality of intention under section 30(1)(f)”. [Para 31]

Questions of motive and intention, by their nature subjective, can seem to go around in conceptual circles.

Motive is not a relevant test in itself under ground (f) – the word motive is not used in the 1954 Act wording. However, by the Court saying that the intention to carry out the works must exist regardless of whether the tenant vacates the premises, this brings back into question the landlord’s motive for wanting to do the works.

Therefore, Lord Sumption stressed that although the landlord’s purpose or motive are irrelevant to ground (f), they are nevertheless material for testing whether such a firm and settled intention to carry out the works exists.

It is irrelevant whether a landlord’s intention is reasonable or whether reasonable changes to the works could be made to allow the tenant’s continued possession.

The “acid test” framed by Lord Sumption distils these questions into a conditionality test.

Put simply, are these works that the landlord intends to carry out even if the tenant vacates?

It may seem remarkable given how many years have passed since the 1954 Act came into being, but this is now an extra hurdle for a landlord to overcome when relying on ground (f).

The outcome of this case will undoubtedly strengthen the hand of tenants in some contested lease renewals where the landlord is relying on ground (f).

Remember though that in this case the landlord admitted that the works were designed to meet the ground (f) test, and that they would not be carried out if the tenant left the premises voluntarily.

The landlord therefore admitted that its intention to carry out the works was conditional. In the words of Lord Sumption: “It intended to carry them out only conditionally on their being necessary to get the tenant out, and not, for example, if he left voluntarily or of the judge was persuaded that the works could be done by exercising a right of entry.”

It followed therefore that the conditional intention was not the fixed and settled intention that ground (f) requires; that fixed and settled intention being “the touchstone of ground (f)” [Para 16].

Perhaps the outcome of the case would have been different if the landlord had not been so candid. In this respect the case is unusual.

However, Lord Sumption also considered that more complex issues would arise if the landlord intended to carry out some substantial part of the proposed works regardless of whether it was necessary to do so to obtain vacant possession from the court, and part of the works only if it was necessary to do so to obtain vacant possession. This might lead to a situation where the unconditional part of the landlord’s works was insufficiently substantial or disruptive to warrant the refusal of a new tenancy, so that additional spurious works had to be added by the landlord for the sole purpose of obtaining possession.

In a situation like that, Lord Sumption concluded the answer is likely to depend on the precise facts. He went on to say:

“If, however, it is established that, at the time of the trial, were the tenant hypothetically to leave voluntarily, the landlord would not carry out the spurious additional works, then the tenant’s claim to a new tenancy would normally fall to be resolved by reference only to the works which the landlord unconditionally intended.” [Para 20]

This is an area where the law may be developed further by the courts in future.

It is likely there will be more litigation in the aftermath of this case, and contested lease renewals could in general become more protracted as tenants are likely to scrutinise their landlords’ development plans more closely.

Landlords will need to put together a well-considered scheme of works or redevelopment and be able to demonstrate a proper intention to complete the works even if the tenant were to change its mind and vacate the premises voluntarily.

It is likely too that in a similar situation a landlord will be required to give an undertaking to the court confirming it has the unconditional intention to carry out the work and that it will do so even if the tenant vacates voluntarily. Remember that in this case the landlord’s undertaking was only to carry out the work if a new tenancy was refused.

The flipside, for tenants, is that if litigation becomes more protracted as a result of this case, it will inevitably drive up costs on both sides.

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