The acid test of intention – business lease renewals

The Supreme Court has handed down its decision in the widely followed and hotly anticipated case of S Frances Ltd -v- The Cavendish Hotel (London) Limited, which is of huge importance to both landlords and tenants in dealing with opposed business lease renewals.

As many of you will already be aware, there are only seven grounds upon which landlords can oppose the granting of a new lease to a tenant, who holds a lease protected by Part II of the Landlord and Tenant Act 1954. One of those grounds is that the landlord, on the termination of the current tenancy, intends to (i) demolish, (ii) reconstruct, or (iii) carry out substantial work of construction. This is known as a ground (f) opposition.

The question before the Supreme Court was whether it was open to the landlord to oppose the granting of a new tenancy to the tenant on ground (f), in circumstances where the landlord gave evidence to say that he only intended to carry out the works for the purposes of getting rid of the tenant.

Following the service of a request for a new tenancy, in response to which the landlord served a counter-notice relying on ground (f), the landlord submitted several schemes in support of its ground (f) opposition. It is reported that the proposed scheme of works was “designed with the material intention of undertaking works that would lead to the eviction of the tenant regardless of the works’ commercial or practical utility and irrespective of the expense.”

The Supreme Court’s decision records that “The landlord’s evidence was that it was prepared to run the risk that the premises occupied by the tenant would be rendered unusable ‘in order to secure its objective of undertaking [the third scheme] and thereby remove the claimant from the premises”, and that one of the schemes was “designed purely for the purpose of satisfying ground (f).”

Lord Sumption, in his decision, accepted that the touchstone of ground (f) is a firm and settled intention to carry out the works, and that the landlord’s purpose or motive are irrelevant, save as material for testing whether such a firm and settled intention exists. The acid test is whether the landlord would intend to do the same works if the tenant left voluntarily. The intention cannot be conditional upon whether or not the tenant persists in a claim for a new tenancy.

Lord Briggs held that it could not have been the intention of Parliament to enable a landlord to defeat a claim for a new tenancy, by asserting and proving an intention to do works purely for the purpose of getting rid of the tenant, such that the works would not be done if the tenant left voluntarily.

Lord Briggs went on to find that neither an undertaking to the court to carry out the works if a new tenancy is refused, nor the examination of the genuineness of the landlord’s intentions will reveal whether the landlord’s intention is of the disqualifying conditional kind. The landlord’s frank admission in the present case as to the underlying purpose (to get rid of the tenant) was all that was necessary to reveal the conditional (and therefore insufficient) intention to do the works.

Guidance was also provided in respect of cases where a landlord intended to carry out a substantial part of works whether or not it was necessary to do so to qualify under ground (f), with part only in order to satisfy ground (f). In that scenario, Lord Sumption said that whilst it would depend on the precise facts, if it was established at the time of trial that were the tenant to hypothetically leave, the landlord would not carry out the spurious additional works, then the tenant’s claim for a new tenancy would normally fall to be resolved by reference only to the works which the landlord unconditionally intended. Lord Briggs’ stated that cases of this kind will probably give rise to factual questions which are incapable of resolution by the proffer of a simple undertaking to the court (which is what currently happens). It was recognised that this may introduce an element of complexity and expense into proceedings, but that there was no other way of giving effect to the intention of Parliament, that a tenant’s statutory right to a new tenancy should not be circumvented by proposed works, which, viewed as a whole, would not have been undertaken by if the tenant left voluntarily.

The news for tenants is therefore good, with a Supreme Court authority that landlord cannot simply have a qualified intention to carry out works for the purpose of establishing a ground (f) opposition.   It would also seem that landlords will have difficulty in simply relying on an undertaking to the court to undertake the ground (f) works. This is however to be tempered by the additional difficulties in establishing whether an intention is unqualified, whether some works are spurious works for the purposes of ground (f), and the added expense of dealing with the same. It remains to be seen as to how matters will now progress.