March 23, 2020

A Landlord’s intention to develop and the possibility of an injunction

London Kendal Street No3 Limited v Daejan Investments Ltd is the first reported case in which the Supreme Court’s findings in S Franses Limited v The Cavendish Hotel Ltd (“Franses”) have been applied. The case specifically considered the objective element of intention and whether the possibility that a tenant might apply for an injunction preventing the works meant that there were not reasonable prospects of being able to carry out the works.

Key Issues

Under section 30 (1) (f) of that Landlord and Tenant Act 1954 (“1954 Act”) a Landlord may oppose a lease renewal if, “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” (“Ground F”).

In order to successfully challenge renewal on Ground F a Landlord must show both:

  1. Subjectively, it has a fixed, settled and unconditional intention to carry out significant works
  2. Objectively, it has reasonable prospects of being able to carry out those works

The Franses case made the subjective test more difficult to satisfy by establishing a requirement that a Landlord’s intention to develop must not be conditional.

Background

The tenant, IWG, had four leases of parts of the ground floor at Park West, Edgware Road. The Lease of Suite C2 was protected by the 1954 Act. The lease of Suite C2 expired on 24 March 2018 and the Landlord served a hostile Section 25 Notice opposing IWG’s claim to a new lease in March 2017, relying on Ground F.

IWG carried on a business of short term serviced office licences to occupiers and the suite in question was pivotal insofar as it was the common area used by the occupiers of other units.

The Landlord wished to redevelop Suite C2 as well as the basement. The Landlord intended that Suite C2 would become the entrance and lobby and also planned to install a lift and staircase connecting the basement.

The Landlord commenced the works but they stopped when IWG complained of significant noise being caused. As a result, IWG threatened injunctive proceedings to stop the works on the basis they breached the Landlord’s covenant to allow IWG quiet enjoyment and, therefore, amounted to derogation from grant.

Arguments

The Landlord served their hostile Section 25 Notice prior to the decision in Franses. Following the Franses decision, the Landlord presented the court with a different scheme of works than it had previously proposed. The tenant queried whether this amounted to a subjective intention to carry out the works and argued that this change in scheme was designed simply to satisfy Ground F and would not otherwise be utilised. The Landlord’s primary witness conceded that the new scheme of works was designed for this purpose and that the expedited programme laid out under the new scheme would not have been proposed if the tenant had left voluntarily.

IWG also argued that the Landlord objectively had no reasonable prospect of being able to carry out the works because the available hours for working were significantly limited given:

  1. The building was used as offices during the day
  2. There were residential units on the upper floors making it difficult to carry out the intended works outside normal working hours

The Tenant said it would certainly apply for injunctive relief to prevent the Landlord from carrying out the works and interfering with its quiet enjoyment. As such, the Tenant submitted that the Landlord would be objectively unable to carry out the works because it would be prohibited by the injunction, as well as the normal limitations that would apply as a result of the noise nuisance the works would cause.

Decision

Saunders J, sitting in the Central London County Court, was comfortable the Landlord had satisfied the Franses subjective test and this was held to have been made out without significant examination.

The following were enough to convince Saunders J of this subjective intention: the Landlord could fund the works; the Landlord had obtained the relevant planning permissions; had retained contractors under a £1.6 million contractfor works and a programme for works had been prepared.

There was also significant evidence that the Landlord’s intention to carry out the works was reached at an early stage, well before the hostile Section 25 Notice was served.

In fact, the Landlord urgently needed to carry out the works as damp and corrosion in the basement had started to threaten the integrity of the building. The Landlord had also given an undertaking to the court that it would carry out the works provided an injunction was not granted.

On the objective test, Saunders J held that, even if an injunction was granted, it would unlikely be absolute. The court would be reluctant to create a situation where one party would be prevented from carrying out works to its own property indefinitely. Instead, the injunction would likely limit the times/types of work that the Landlord could carry out.

As such, the Tenant could not show that the Landlord had no real prospect of being able to carry out the works. The Landlord was therefore entitled to rely on Ground F in denying the Tenant a new lease and to recommence the proposed works.

Implications

This is the first reported case in which the Franses test has been applied, and is a positive decision for Landlords. Redevelopment works are often noisy and intrusive, meaning there is a high risk of complaints from tenants. This case demonstrates that the mere possibility in the future of injunctive proceedings will not be suffice to prevent a landlord from opposing a tenant’s application to renew their lease.

The article first appeared in our Real Estate Bulletin - March 2020.