A recent Supreme Court case in the UK could have a serious impact on some long-term investors’ plans

Not every legal case is relevant to property investors, but be assured this column is devoted to showcasing only those recent decisions that are significant for the real estate sector. Where better to start, therefore, than the very recent decision of the Supreme Court, our ultimate domestic court of appeal, in Franses v The Cavendish Hotel (London) Ltd[2018] UKSC 62 handed down at the end of, what we are still pleased to call, the Michaelmas Term.

The decision matters because it is about recovering possession from a sitting commercial tenant who has statutory protection under Part 2 of the Landlord and Tenant Act 1954. It matters because if, as the present term expires, you want to re-let to another tenant, take back the premises for your own use, or assemble vacant possession for any reason (such as some future development), things just got a great deal more difficult.

To recap, Part 2 of the Landlord and Tenant Act 1954 confers a qualified security of tenure on business tenants (unless the parties contract out). A tenant in occupation of premises under a tenancy for a term of years may stay over at the end of the term, and is entitled to a new tenancy beginning at the date of expiry, unless the landlord can make out one of the statutory grounds of opposition specified in section 30(1). One of those grounds – and perhaps the one most frequently relied upon – is that the landlord intends to demolish or reconstruct the premises (as provided under section 30(1)(f)). 

In Franses v Cavendish the landlord hotel group relied upon so-called ground (f) to recover the ground floor and basement of its Jermyn Street premises. In order to prove its case, Cavendish proposed a scheme of works that was devised specifically to get possession of the premises. The proposed works had no practical utility; they included a plan to take down a wall and put it up again. The sole purpose of the works was to obtain vacant possession, albeit the landlord’s longer-term plan was a more ambitious plan to add 28 rooms to its hotel.

The trial judge found that the landlord genuinely intended to carry out the proposed works if they were necessary in order to get rid of the tenant, but that it did not intend to carry out the works if it were not necessary to do so for that purpose. It would not, for example, have been necessary to do the works if the tenant agreed to go voluntarily. On the state of the law as then understood, the landlord succeeded, relying on a long line of authority that established motive, purpose and reasonableness were irrelevant and that all the landlord had to prove was (i) that it had a genuine intention to carry out the qualifying works and (ii) it would practically be able to do so. 

The tenant appealed and lost and appealed again to the Supreme Court. The only issue on the appeal was whether the landlord had the necessary intention to carry out the proposed works. The Supreme Court unanimously held that it did not. 

The Court decided that the landlord’s intention to demolish or reconstruct the premises must exist independently of the tenant’s statutory claim to a new tenancy, so that the tenant’s right to occupation under a new lease would serve to obstruct the work. The landlord of course argued that the tenant’s right to a new lease was obstructing the works, because they could not be done without obtaining possession. However, in the judgment of the Supreme Court, a conditional intention of this kind is not the fixed and settled intention that ground (f) requires.

What does this mean? It means that although a landlord’s motive or purpose are irrelevant in themselves, they have now taken on a whole new importance. At trial, a landlord’s witnesses can now expect to be cross-examined extensively over such matters, not just to test the genuineness of their professed intention to carry out the works relied upon, but also to discover whether that intention is conditional in any material sense. Likewise, detailed questioning on the utility of the works can be expected, given that a lack of utility may be evidence from which the conditional character of the landlord’s intention may be inferred. All good news, perhaps, for the lawyers and tenants, less so for the investor with a longer-term plan.

Some years ago I recall Lord Neuberger, late head of the Supreme Court, delivering a lecture at RIBA advocating the repeal of the 1954 Act. He argued, as I recall, that in the residential sector we had seen the effective abolition of security of tenure, with the repeal of the Rent Acts and introduction of ASTs and no-fault notices to quit under the L&T Act 1988, without the sky falling in. Why then the need for protection in the commercial sector? It was an unjustified fetter on what should be a free market. 

Lord Neuberger’s clarion call was not heeded by lawmakers. I have no idea why not and why Part 2 of the 1954 Act should not go (along, say, with ‘upwards only’ rent review clauses as in post-2008 Ireland or even rent-free periods to engineer artificially high headline rents). But while we still have this legislation, investors will oftentimes need to deal with the restrictions it imposes – and now the difficulties presented by Franses.

Practice point – keep on contracting out of the 1954 Act.