A recent County Court decision involving Ministry of Sound Limited is a useful reminder of the test the court will apply when asked to include a landlord’s redevelopment break option in a renewal lease under the Landlord and Tenant Act 1954 (1954 Act).
The tenant occupied a well-known nightclub premises in central London under a protected business tenancy and was seeking a renewal lease. The parties had failed to agree the terms of the renewal lease and the court was called upon to settle them. The key matter in dispute between the parties was whether the renewal lease should contain a rolling redevelopment break in favour of the landlord, and, if so, how the inclusion of that clause should affect the rent.
The court ultimately approved the landlord’s request for a redevelopment break and then reflected the resulting uncertainty for the tenant in the rent, applying a 26% discount.
Key takeaways
The threshold is “real possibility”, not probability
The judge adopted the established approach that a redevelopment break is appropriate where the landlord proves there is a “real possibility (as opposed to a probability)” of redevelopment during the term of the new lease, unless there is some major factor pointing the other way. The court emphasised that the 1954 Act is not intended to let a tenant’s rights to a renewal lease stand in the way of the landlord's redevelopment of the premises.
Landlords do not need a fully formed, ready-to-go scheme
The court noted it is not necessary (as a matter of principle) for a landlord to show imminence, planning permission, funding or a specific scheme to establish there is a “real possibility” of redevelopment (although those matters may be relevant evidentially). On the facts, the court was satisfied the landlord had shown that there was a real possibility that the premises would be required for redevelopment during the proposed renewal lease term.
“Iconic tenant” arguments may have limited traction
The tenant argued the break clause would be existentially damaging to their business. The court was not persuaded that this amounted to a “major factor” justifying refusal of a landlord's break and viewed the tenant’s case as overstated and insufficiently substantiated.
The terms of the proposed break matter
The landlord was proposing a rolling break, exercisable on at least nine months’ notice, not to expire before end of June 2028. The court held that that approach was “fair and reasonable and proportionately balances the competing commercial interests” of the parties.
Rent will follow risk: redevelopment breaks can drive a material discount
In determining the open market rent, the court applied a 26% discount to take into account the effect of the rolling break, rejecting the extremes advanced by the parties' experts. If a landlord wants flexibility, it is the court's view that it should expect to pay for it through a reduction in the rent (and tenants should factor this into their negotiations).
Don’t overlook consequential drafting points
The court also introduced an adjustment to the renewal lease, where if terminated via the landlord’s redevelopment break (or via a successful redevelopment opposition), the tenant would not be obliged to carry out specified reinstatement and yielding-up works, thereby reducing the risk of wasted spend by the tenant immediately before redevelopment.
Conclusion
Landlords and tenants alike will be interested in the decision and the "real possibility" test applied by the court when asked to consider the inclusion of a landlord's redevelopment break. Both landlords and tenants should have regard to how any proposed clause will operate, so as to ensure a fair balance between the parties and keep in mind the likely effect of the break on the rent and other provisions in the lease.
