Do Contractual Renewal Options Disapply Part II Of The Landlord And Tenant Act 1954?

Nicola Charlton (Partner) and Elisha Langridge (Managing Associate) in our Property Disputes team at Womble Bond Dickinson (WBD) acted for Park Cakes Limited, the UK’s leading cake and hot dessert manufacturer, in a claim concerning an important and previously untested issue of law relating to commercial leases.

This article considers the issue addressed by the Court and its wider relevance for landlords and tenants.

Background

The case concerned whether two business tenancies containing tenant-only contractual options to renew were protected by Part II of the Landlord and Tenant Act 1954 (the “1954 Act”), with potentially significant consequences for both landlord and tenant.

Each lease included an option for the tenant to renew for a further 10-year term on prescribed terms, subject to certain conditions.

Core issue

The central issue was whether a tenant’s contractual option to renew constitutes an “agreement for the grant of a future tenancy” within the meaning of section 28 of the 1954 Act.

• The options entitled the tenant to renew the lease by serving notice on the landlord
• Section 28 provides: “Where the landlord and tenant agree for the grant to the tenant of a future tenancy of the holding, or of the holding with other land, on terms and from a date specified in the agreement, the current tenancy shall continue until that date but no longer, and shall not be a tenancy to which this Part of this Act applies.”
• If the options amounted to such an “agreement”, Part II protection would be disapplied. The tenant’s only route to renewal would then be through the contractual option, rather than the statutory renewal regime under the 1954 Act.

County Court decision

The County Court held that the contractual options did not fall within section 28.

• The mere presence of a tenant-only option to renew does not constitute an agreement for the grant of a future tenancy
• District Judge Bond accepted the tenant’s case (advanced by James Andrews-Tipler of Falcon Chambers) that an option only becomes a binding bilateral agreement upon valid exercise.

Accordingly, the leases remained protected by Part II of the 1954 Act.

Court of Appeal

The landlord obtained permission to appeal.

Given the impending deadline for exercise of the contractual option, the appeal was treated as urgent and:

• leapfrogged to the Court of Appeal pursuant to CPR 52.23, and
• expedited, with the hearing listed within weeks of the application.

Following submissions from counsel for the landlord (Faisel Sadiq of Gatehouse Chambers), the Court of Appeal (Lewison LJ, Asplin LJ and Elisabeth Laing LJ) dismissed the appeal. Written reasons are awaited.

Why this matters

This is a significant and welcome outcome for tenants.

• It confirms that unexercised renewal options do not disapply security of tenure under the 1954 Act
• Tenants therefore retain the ability to choose between:
  • Statutory renewal (including the prospect of a market rent under section 35), and
  • Contractual renewal (on the terms set out in the lease).

This distinction can be critical. In some cases, reliance solely on a contractual option may expose tenants to less favourable terms, including higher rents or more restrictive provisions.

More broadly, the decision avoids a potentially serious lacuna in the 1954 Act, whereby parties could have achieved a form of “contracting out by the back door” without complying with the statutory safeguards in section 38A.

What should landlords and tenants do?

Where leases contain renewal options, parties should:

• Consider carefully how contractual options interact with statutory rights under the 1954 Act
• Review upcoming deadlines well in advance, and
• Take advice on the relative advantages of contractual versus statutory renewal routes.

If you are dealing with similar issues, our Property Disputes team would be happy to assist.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.