Aisle be staying – Sainsbury’s defeats landlord’s redevelopment ground

Introduction

A commercial tenant, who has the protection of the LTA 1954, is entitled to a renewal lease at the end of the contractual term. However, section 30 of the LTA 1954 sets out seven grounds upon which a commercial landlord can oppose the grant of a renewal lease. One of those grounds allows the landlord to oppose the renewal based on its intention to carry out works of redevelopment, as set out at section 30(1)(f) (‘ground (f)’): “that 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.”

The Sainsbury’s case

The case involved a Sainsbury’s Local store on Kentish Town Road, London. Sainsbury’s lease included ground floor premises, used as the store, as well as basement and three upper floors, which, importantly, were unoccupied by Sainsbury’s. Sainsbury’s requested a new lease from its landlord under the LTA 1954.

The landlord opposed the request based on ground (f), having obtained planning permission to change the use of the upper floors from ancillary retail floor space to residential, which also involved some minor alterations to the ground floor. The landlord subsequently revised its proposals, obtaining permission to partially lower the existing basement and to refurbish the upper floors as offices instead, with plans for alterations to the ground floor remaining.

The primary reason for the landlord’s defeat was because the Court found it had failed by a “very long way” to prove it had a genuine and settled intention to carry out the works, and it had also failed to demonstrate it was practically able to carry out the works and that it would carry out the works whether or not the tenant voluntarily gave up possession (applying the legal test confirmed in the Supreme Court decision of S Franses v Cavendish Hotel (London) Ltd [2018]).

An interesting and novel legal point arose out of the fact that Sainsbury’s only occupied the ground floor of the premises but not the rest of its demised premises (i.e. the basement and upper floors). This involved the statutory interpretation of “holding” used in section 30 of the LTA 1954.

It was successfully argued by Sainsbury’s in this case that when assessing the landlord’s ground of opposition based on ground (f), only the part of the premises which the tenant is occupying is relevant. This is based on the wording of section 30(1)(f), as set out above, which looks at the landlord’s intention "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”. The Court decided that “the holding”, for these purposes, only comprised Sainsbury’s store on the ground floor, meaning unoccupied areas, such the basement and the upper floors, didn't fall within the scope of ground (f). The Court went on to find that the landlord’s works relating to the ground floor, comprising the widening of a staircase and removal of part of a wall, didn't satisfy the test in ground (f), primarily as they didn't constitute “substantial work of construction”.

This case was the trial of a preliminary issue on ground (f) and, with the landlord’s ground of opposition defeated, will now move on to the second stage of deciding the terms of the renewal lease, including considering the extent of the property comprised in the new tenancy. This too will involve an assessment of the extent of the “holding” but in the context of section 32 of the LTA 1954, where it is interpreted differently. This is because, under this section, a tenant can request, upon renewal, that the new tenancy relates only to the area of the premises which it currently occupies for the purposes of its business, but the landlord can insist the tenant takes a new lease of the whole premises as demised by the current tenancy. Therefore, Sainsbury’s may still be forced to take a new lease of the whole premises, even though ground (f) was only judged against those parts it occupies.

What does this case mean for landlords?

Landlords will need to be alive to the possibility of tenants seeking to reduce their “holding” to frustrate redevelopment proposals, where the landlord is opposing a renewal lease on ground (f). A tenant could decide to vacate part of its premises, when approaching renewal of its lease, so that it only occupies the part of the premises which are largely unaffected by landlord’s intended works, even if it wishes to retain a lease over the whole of the demised premises. In theory, it could then extend its occupation to the rest of the premises again once the preliminary issue of ground (f) has been decided. 

The answer for landlords won't simply be to devise a scheme of works for the purpose of satisfying ground (f), which are perhaps more extensive than they otherwise would have been, given the requirements of S Franses set out above. But landlords may take comfort from the fact that in many cases it won't be operationally possible or desirable for tenants to vacate part of their premises.