The decision is of interest because it is not particularly common for cases involving tenant-only break clauses to reach trial.
WolfBite - the key takeaways
• When a tenant of a lease that benefits from security of tenure under the Landlord and Tenant Act 1954 (LTA 1954) requests a new lease, either party can propose terms that are different to the existing lease.
• If the landlord and tenant cannot agree the terms of the new lease, the court will determine them.
• The LTA 1954 dictates how the court will decide the premises, duration, new rent and “other terms” of the new tenancy.
• If either party seeks to insert a break clause into the new lease, this is considered to be an “other term”.
• When determining “other terms”, the court will have regard to the terms of the current lease and all relevant circumstances. It will also apply guidelines set out by the House of Lords in earlier case law.
• The onus will be on the party seeking the break clause to show that there is a good reason to include it and that it is fair and reasonable to do so.
• In this case, the current lease did not contain a break clause and the tenant, Kwik-Fit, was unable to persuade the court that it was fair and reasonable to include one in the new lease.
• The decision supports the view that, to be successful, a tenant seeking to include a break clause will need to justify this by reference to factors affecting the particular premises, not just general policy considerations.
As an aside, the Law Commission has said that it intends to publish its long-awaited consultation on options to reform the LTA 1954 on 19 November 2024. We will cover that in a future article.
Security of tenure
The LTA 1954 provides that, subject to certain exceptions, where a tenant occupies premises for business purposes it will have “security of tenure”.
Security of tenure gives a tenant of a fixed-term lease the right to remain in occupation after the expiry of the contractual term, and to apply for a new lease.
A lease with security of tenure will continue after the end of the contractual term until it is brought to an end by one of the methods set out in the LTA 1954.
The way the procedure works is that the landlord or the tenant can serve a notice bringing the current lease to an end. They can, in the notice, indicate whether or not they wish to enter into a new lease.
Where the tenant wants to put a new lease in place, and the landlord agrees to this in principle, this is called an “unopposed” lease renewal claim.
It is, however, very often the case in an unopposed claim that, whilst both parties agree to enter into a new lease, they will disagree about the terms of the new lease.
If the parties cannot reach agreement, the court is required to determine the terms of the new lease in accordance with specific provisions set out in the LTA 1954.
In particular, the LTA 1954 sets out how the court should determine the extent of the premises, duration, new rent and “other terms” of the new lease.
Kwik-Fit’s current lease
Kwik-Fit took a 25-year lease of the premises in 1996.
The contractual term of the lease ended in 2021 but, because it had security of tenure, the tenancy carried on after that date in accordance with the continuation provisions of the LTA 1954.
The original lease did not contain a break clause.
The parties’ proposals for the new lease
Kwik-Fit started the statutory renewal process in early 2021.
The landlord did not oppose the grant of a new lease, but the parties disagreed on what terms the new lease should include.
By the date of the trial, the parties had agreed that the new lease should be for a term of 15 years (being the maximum length the court is permitted to order), but one of the main issues was whether it should contain a tenant-only break clause at years 5 and 10.
Court’s approach to tenant break clauses
The inclusion of a break clause in a renewal lease is categorised as an “other term”.
When deciding “other terms”, the LTA 1954 provides that the court must have regard to the terms of the current lease and to all relevant circumstances.
The leading case on how the court will determine the “other terms” of the new lease is O’May v City of London Real Property Co Ltd [1983] in which the House of Lords set out a number of guidelines which are, broadly, as follows:
• The court must first consider the terms of the current lease.
• If a party seeks to change the terms of the current lease, that party will have the burden of persuading the court that the change is justified.
• The change must, in the circumstances, be fair and reasonable.
• There must be a good reason, based on fairness, to impose the proposed new term.
• It may be relevant to consider whether, if the change is made, the other party could be adequately compensated by adjusting the rent.
• The court should take into account the comparatively weak negotiating position of a sitting tenant, and the general purpose of the LTA 1954 which is to provide security of tenure so the tenant can continue carrying on its business from the premises.
• Otherwise, the court has a wide discretion.
• It is not the intention of the LTA 1954 to forever freeze the terms of the current lease; if the terms of the current lease are obsolete or deficient, this may justify a change.
Whether to include a break clause in a new lease more commonly comes up in the context of landlord redevelopment break clauses. If the landlord can persuade the court that there is a real possibility that redevelopment will take place during the term of the new lease, the court is likely to include a landlord’s redevelopment break clause. We looked at a good example of this in LTA 1954 – breaking up is hard (but still possible) to do.
It is less common for the courts to have to determine whether the new lease should include a tenant-only break clause, particularly where the current lease does not contain a break right at all.
Interestingly, there are no binding decisions on the point but some lower courts have suggested that, when considering whether to include a tenant break clause in the new lease, the same test as for landlord break clauses should apply by analogy. That is, a tenant’s break clause can be inserted if there is a realistic prospect of the event happening for which the break right is sought (for example, if there is a realistic prospect of the tenant wishing to relocate during the term of the new lease).
Was Kwik-Fit entitled to a tenant break clause in its new lease?
In this case, Kwik-Fit sought a tenant’s break clause that was not limited in any way by reference to any particular future event (such as a relocation).
During the trial, however, it attempted to argue that there were various matters that might cause it to exercise the proposed break clause, such as the creeping encroachment of surrounding residential development, obstruction caused by car parking and the risk of the premises becoming of an inadequate size to allow for electrical vehicle charging.
The Judge considered all of these matters to be general concerns. They did not relate specifically to the premises in question, were largely unsupported by evidence and, ultimately, “fanciful”.
The court was similarly unpersuaded by the argument that Kwik-Fit had a policy of seeking leases for 15 years with breaks at 5-year points.
Evidence from other lettings confirmed that the policy was not absolute and could (and did) give way to other factors. Kwik-Fit had taken leases both longer and shorter in length, some with no break clauses and others with more frequent breaks than every 5 years.
Similarly, although it was accepted that evidence from competitors suggested that it was industry practice to seek leases of 5 years or more with tenant break clauses at least after 5 years, this was merely the starting point that could and did yield to other commercial considerations in particular circumstances. A 15-year lease without a tenant’s break clause could therefore not be said to be obsolete or an anomaly.
Drawing everything together, the court concluded that:
• The current lease did not contain a break clause.
• Kwik-Fit had the burden of demonstrating that it was fair and reasonable to include a break clause in the new lease.
• Kwik-Fit was unable to establish that there was a real possibility of needing to terminate the new lease due to the premises becoming unsuitable.
• The matters it tried to rely on to justify the inclusion of a break clause were general in nature and did not apply to the subject premises specifically.
• The absence of a break clause did not make the lease wrongly frozen or obsolete; market practice showed that commercial considerations applied, and that tenants sometimes accepted leases without break clauses.
• Kwik-Fit wanted security of tenure for 15 years. It could have agreed a shorter term or a lease with a mutual break clause, but did not do so.
• Where a landlord comes to exercise a redevelopment break clause it also needs to serve a further LTA 1954 notice formerly opposing lease renewal and the court may then need to determine whether the landlord can prove its ground of opposition. A tenant’s break right would not be regulated in this way.
• The question of whether the landlord could be adequately compensated by an associated increase in the rent if a tenant break clause were to be inserted, was a neutral point. The tenant could equally be adequately compensated by a reduction in the rent if no break clause was included.
• Considering all relevant factors, it was not fair and reasonable to include a tenant’s break clause in the new lease.
The court went on to determine two remaining issues, finding that no alteration should be made to a provision concerning contributions to the upkeep of an access road, and that the new rent should be £39,300 per year.
It is important to emphasise that this was only a County Court decision. It is therefore not binding on other courts.
It will, however, be of persuasive weight in future cases and, given that not many unopposed lease renewal claims have gone to trial that have considered the inclusion of tenant-only break clauses, the decision is of real interest.
Please note that all our blogs/articles are designed to be helpful and informative rather than advisory. They represent our understanding of English law and its general practice as at the date the blogs/articles were published. You should seek specific legal advice on any particular legal issue you may have.
