The reluctance of the courts to disrupt landlords' development plans
Judgment was recently handed down in the Court of Appeal in B&M Retail Ltd v HSBC Bank Pension Trust (UK). The appeal concerned the County Court's decision to grant the landlord an immediately exercisable redevelopment break right in a business lease renewal.
The tenant, B&M, had requested a new tenancy of retail premises under section 26 of the Landlord and Tenant Act 1954. There was a post room error meaning the notice had not come to the landlord (HSBC)'s attention and in the meantime HSBC entered into a conditional agreement for a new lease of the premises with Aldi, which obliged Aldi to carry out substantial redevelopment works, conditional on the landlord obtaining vacant possession of the premises by 2025. B&M issued proceedings for a new lease by which time it was too late for HSBC to oppose the renewal. HSBC sought an immediately exercisable rolling redevelopment break clause as part of the new lease.
On 17 March 2023, a decision was reached in the County Court that a new lease for a five year term with a rolling redevelopment break clause would be granted.
B&M appealed this decision on the grounds that it was wrong to grant the redevelopment break clause which was operable at any time during the term, as it did not offer the tenant a reasonable degree of security of tenure and was therefore inconsistent with the purpose of the Act. It argued that the Judge did not carry out a proper balancing exercise or give the tenant's security of tenure significant weight and it was wrong to treat the landlord's wish to redevelop as paramount.
HSBC argued that the judgment was correct, the Judge did conduct a balancing exercise and concluded that the absence of the break clause would run the risk of preventing or unreasonably delaying the development, the plans for which were well developed. Such delay was not justified in the circumstances where it might jeopardise the landlord's plans altogether, particularly given the longstop date in the agreement for lease with Aldi.
The Court found that the Judge had directed himself in accordance with the correct legal test and recognised there was a balancing exercise in relation to both parties' interests. The Judge had fairly considered that exercising the break clause could leave the tenant vulnerable to business disruption and the absence of a break right would frustrate HSBC's redevelopment plans. The Judge had considered there might be some circumstances where it is reasonable to delay the operation of a break clause but in this case it was not appropriate if that delay might frustrate the development entirely and that view was consistent with authorities. It was noted that "the Court must decide what is fair and reasonable as between the parties in all the circumstances".
The appeal was dismissed and a redevelopment break clause, which was capable of being exercised immediately, was permitted. The Court did not accept the tenant's argument that an immediately exercisable break is inimical to the grant of a new tenancy under the 1954 Act or inherently wrong.
Ultimately, as a fair balance needs to be struck between a tenant's right to security of tenure and a landlord's desire to redevelop. The Court has a wide discretion to decide this, considering what is fair and reasonable in all the circumstances. Where redevelopment plans are in motion and could be frustrated by delaying or refusing a break option, this is a factor that could carry significant weight but the outcome of the balancing exercise will always turn on the specific facts.