LTA 1954: breaking up is hard (but still possible) to do
When commercial premises are old and tired, the landlord may want to demolish or reconstruct them with a view to selling or re-letting.  Many leases will, however, be protected by the Landlord and Tenant Act 1954 (LTA 1954), meaning that the tenant has a right to remain in occupation and to a new lease.  
This article considers the case of B&M Retail Ltd v HSBC Bank Pension Trust (UK) Ltd [2023] in which the court had to determine what should happen where the landlord’s wish to redevelop conflicted with the tenant’s right to remain, in particular whether a break clause should be included in the new lease to enable the landlord to pursue its plans.
Security of tenure
The LTA 1954 provides that, subject to certain exceptions, where a tenant occupies premises for the purposes of its business it will have “security of tenure”.
This gives a tenant of a lease that was granted for a fixed number of years the right to remain in occupation after the expiry of the contractual term, and to apply for a new tenancy.
“Unopposed” lease renewal claims
If a tenant of a lease with security of tenure remains in occupation for business purposes at the end of the contractual term, the tenancy will continue until brought to an end by one of the methods set out in the LTA 1954.
There will, however, come a point where the landlord or tenant will either want to put a new lease in place (for example, because the tenant wants the certainty of a new fixed-term lease, or the landlord believes it can charge a higher rent), or to terminate the tenancy (for example, if the tenant finds new premises).
Where either the landlord or the tenant wants to put a new lease in place, the LTA 1954 enables the landlord to serve a section 25 notice, or the tenant to serve a section 26 request, to bring the current tenancy to an end but setting out their proposals for the terms of a new lease.
Where such a notice is served the parties will have a window in which to try to agree the terms of the new lease.  This period can be extended, failing which either party can ask the court to determine the terms of the new lease.
This procedure is called an “unopposed” lease renewal claim, because the landlord does not oppose the grant of a new lease.  The parties will, however, often disagree about the terms of the new lease.  
It is common for unopposed renewal claims to be resolved by agreement and, conversely, rare for them to go to a final hearing at court.
Where an unopposed claim does go to trial, the court is required to determine the terms of the new tenancy (the length of the new lease, new rent, and any other terms) in accordance with particular provisions set out in the LTA 1954.
“Opposed” lease renewal claims
A landlord of a tenancy with security of tenure can oppose the grant of a new lease, but only on limited grounds contained in section 30(1) of the LTA 1954.
The landlord can oppose renewal either by serving what is sometimes called a “hostile” section 25 notice, specifying the grounds of opposition it relies on, or by serving a counter-notice within two months if the tenant has already served a section 26 request for a new lease.
One of the grounds of opposition that is most often used is the so-called “redevelopment ground”.  This applies where the landlord intends to demolish or reconstruct the premises at or shortly after the end of the current tenancy and cannot reasonably do so without obtaining possession.  
To succeed on this ground, the landlord needs to show that it has a firm and settled intention to carry out the proposed works, a realistic prospect of achieving that intention, and that it would intend to do the works even if the tenant left voluntarily. 
Redevelopment break clauses
A landlord that intends to redevelop will usually serve a hostile section 25 notice, or a counter-notice opposing the tenant's request for a new lease, relying on the redevelopment ground.
If the case goes to court, landlords will sometimes seek the inclusion of a break clause in the new lease as a fall-back in case their opposition is unsuccessful.  If the court is not satisfied that the landlord can carry out its redevelopment straightaway, but could do so in the near future, it might order the grant of a new lease but include a redevelopment break clause that the landlord can exercise when ready to proceed.  
Alternatively, landlords who accept that they are not ready to move ahead with their redevelopment imminently might not oppose renewal but seek the inclusion of a break clause in the new lease. 
In either scenario, the new lease will itself have security of tenure, so the landlord would also need to serve a further hostile section 25 notice to bring the new lease to an end.
B&M Retail Ltd v HSBC Bank
This case involved a 40-year-old unit that had been let in 2000 on a 20-year lease.  It was used by the current tenant, B&M, as a retail store and garden centre. 
The landlord had, however, entered into an agreement to grant a new lease to Aldi.  Under the agreement, Aldi would carry out a major programme of works for the landlord, including stripping back the building to its frame, replacing external and roof cladding, dividing the unit in two and reconfiguring one of the new units for a new supermarket.
In order to do this, the landlord needed vacant possession from the current tenant.
Unfortunately for the landlord, due to problems in its post-room during the coronavirus pandemic, its attempt to serve a hostile section 25 notice was not actioned, and a section 26 request served by the tenant was not forwarded to the relevant person until it was too late to serve a counter-notice.  
The landlord was therefore out of time for opposing renewal.
The tenant commenced lease renewal proceedings.  
The landlord, unable to oppose renewal, was limited to raising points on the terms of the new lease.  It accordingly sought the inclusion of a redevelopment break clause.
The court reviewed the earlier case-law and concluded that the weight of those authorities indicated that it was not the policy of the LTA 1954 to prevent redevelopment.  So long as a landlord can show that there is a “real possibility” (as opposed to a probability) that the redevelopment can take place, a redevelopment break clause should be allowed.  
Although the court was required to carry out a balancing exercise, the trial judge considered that, unless there is a major factor pointing the other way, a landlord's right to redevelop “trumps” a tenant's entitlement to security of tenure.  
The trial judge also considered that landlords should generally be allowed to pursue their redevelopment plans quickly, although there may be circumstances in which it might be reasonable to delay the operation of a break clause.
Having considered the evidence from the parties’ respective planning experts, the trial judge was persuaded that there was a “real possibility” in this case that the landlord would obtain planning permission.  
Accordingly, the court ordered the grant of a new five-year lease but with a rolling break clause that the landlord could operate immediately if it wanted by giving six months’ notice.  
The tenant appealed. However, in a judgment handed down on 10 October 2023, the appeal was dismissed. 
Although the appeal judge thought it unhelpful to have used the image of the landlord holding a “trump card” over the tenant, overall the trial judge had still carried out the proper balancing exercise when weighing up the parties’ competing interests. Whilst it might, in some circumstances, be reasonable to delay the operation of a break clause, it would not be appropriate to do so if the delay might operate to frustrate the redevelopment. There was no rule that there should always be a delay. The trial judge had been entitled to conclude that the new lease should contain an immediately operable redevelopment break clause.

If and when the landlord exercises the break option, it will also need to serve a hostile section 25 notice and prove to the court that it satisfies the redevelopment ground.
Where a redevelopment break clause is included in a new lease, it is not unusual for judges, striving to strike a fair balance between the parties’ competing interests, to direct that the break should be delayed to give the tenant security of tenure for a further period of time.  Subject to any further appeal, this case shows that a delay is not guaranteed.  
For tenants, there is a risk that the court will order the inclusion of a redevelopment break clause operable immediately, even where the landlord has not opposed renewal.
For landlords, the fact they might have missed the opportunity to oppose renewal may not be fatal.  A redevelopment break clause may give them a second bite at the cherry.
The case also emphasises the importance of having the right factual and expert evidence in place where the landlord intends to redevelop. The landlord’s plans could have been scuppered had the court considered that there was anything less than a “real possibility” of obtaining planning consent.