To break or not to break – when will the Court grant a landlord break clause in a renewal lease?

The Landlord and Tenant Act 1954 (the “Act”) protects the occupation of business tenants at expiry of lease term, but a recent decision of the High Court gives hope to landlords that a redevelopment break clause may still be granted on renewal even when the grant of a new lease is not formally opposed. Colin Fenny, partner in Harrison Drury’s property litigation team, looks at the case in more detail.

In B&M Retail Limited v HSBC Bank Pension Trust (UK) Limited [2023], the tenant had a lease protected by the Act. On expiry of the lease term, the tenant exercised its rights under the Act and served a notice under section 26 of the Act (“Section 26 notice”) on its landlord requesting a new lease.

The landlord did not serve a counter notice, so it was not able to oppose the grant of a new lease to the tenant despite its intentions for redevelopment of the property, and only became aware of the Section 26 notice long after expiry of the deadline for opposing the grant.

However, the landlord had by then already entered into an agreement for a new lease with another party, which included the redevelopment of the property.

When the tenant applied for a new lease, the landlord – having lost its chance to oppose the application itself – sought to include a redevelopment break clause exercisable immediately as one of the new lease terms.

County Court decision 

The County Court considered the terms and ordered that there should be a new five year lease, with a rolling redevelopment break exercisable immediately on six months’ notice.

The tenant appealed to the High Court, arguing that including the redevelopment break clause would defeat the purpose of the Act, which was to give the tenant a reasonable degree of security of tenure.

High Court decision

The High Court dismissed the appeal, stating that the County Court had correctly weighed up the interests of the tenant against the landlord’s wish to redevelop the property.

Sometimes it would be reasonable to require the landlord to delay its redevelopment plans, however, sometimes those competing interests could not be reconciled and delaying the redevelopment would cause greater harm to the landlord than including the break clause would cause to the tenant.

This was one of those times where delaying might jeopardise the redevelopment.

In coming to this decision, the judge had considered the well-developed plans, the fact that planning permission had been applied for and the terms of the agreement – specifically the long stop date – and that the tenant appeared to have taken steps to find alternative premises.

The judge has also considered the fact that the tenant appeared to have taken few steps to find alternative premises.

Overall, it considered that what was fair and reasonable here was the inclusion of the break clause.

Implications for tenants 

This may be difficult for tenants, having perhaps felt reassured that if a landlord has not opposed renewal, then the tenant is guaranteed a reasonable security of tenure without the threat of a looming break.

However, it involves a balance between the interests of landlord and tenant. Here the tenant was unlucky to have a landlord that was able to prove its intention and suffer significant loss if development did not take place.

Implications for landlords

This was a lucky escape for the landlord who missed its opportunity to oppose renewal. However, landlords should not assume they will succeed in obtaining a break clause.

A landlord will need to show evidence that this need should trump the benefit to the tenant of a longer guaranteed term. If that evidence is not persuasive, the court will not include a break clause.

If you are a tenant or a landlord looking for more information, please contact Harrison Drury’s property litigation team on 01772 258321.