Sadly for the landlord and tenant world, the appeal in London Kendal Street No 3 Ltd v Daejan Investments Ltd  PLSCS 166, the first County Court decision after the Supreme Court's ground breaking decision in S Franses Ltd v The Cavendish Hotel (London) Ltd  UKSC 62;  EGLR 4 has settled. The application of the new conditional intention test formulated in Franses was a key issue in the case since the landlord gave evidence that it would not have timetabled the works as it did if the tenant had left the property voluntarily.
The first instance judgment failed to address this issue and so it had been hoped that the appeal would shed much needed light on how the new test will be applied in practice. Unfortunately it will take a further dispute to provide practitioners with substantive guidance on this.
The claim concerned part of a 10-storey building in prime central London, which the tenant let for the purposes of its business as a serviced office provider. The tenant occupied parts of the building under four separate leases, one of which had a five year term and three of which have a ten year term. The landlord wishes to redevelop the basement below the tenant's premises and convert the part of the building to which the proceedings related (the "Premises") into an entrance to the basement. They therefore opposed the tenant's claim for a new lease of the Premises.
Landlords who wish to oppose the renewal of a lease on redevelopment grounds have to satisfy a two-part test and demonstrate that at the date of trial: (i) they have a genuine intention to carry out qualifying works, known as the subjective test; and (ii) that they are practically able to do such works - the objective test. The works in question also need to be sufficiently “substantial" that the landlord cannot carry them out while the tenant remains in occupation.
Prior to Franses, landlords could satisfy ground (f) by designing a scheme of works with the sole purpose of satisfying the requirements of the Landlord and Tenant Act 1954.
Since the introduction of the new test, landlords need to overcome the additional hurdle of showing that they would carry out the same works even if the tenant left voluntarily, to establish the requisite subjective intention. In Franses the court clarified that a desire to remove their tenant may not disqualify landlords from satisfying ground (f) if it is based on legitimate commercial considerations. However, a number of points remained unclear.
In the case before the County Court it was common ground that the proposed works were sufficiently substantial to satisfy ground (f). Therefore, the County Court’s sole focus was whether the landlord had a genuine subjective intention to carry out the works, and was practically able to do so.
The tenant’s key arguments were that:
a) Subjective test
The timing of the works was (a) wholly dependent on the need to satisfy the redevelopment ground and (b) was not commercially sensible. The landlord served their section 25 notice terminating the tenancy in March 2017, prior to the decision in Franses. Significantly, the decision led to the landlord amending their scheme of works. The landlord’s changing scheme was evidence of the landlord’s intention to produce a scheme, the purpose of which was to overcome the tenant’s claim for a new tenancy. The landlord’s principal witness accepted this at trial.
The timing of the works was also a strong indicator that the landlord’s only motivation for doing the works at the time it planned to do them was the removal of the tenant from the premises as, there was no point doing the basement works until (i) planning permission for a change of use of the basement had been obtained; and (ii) a tenant for the basement had been found whose specifications for the premises were known.
b) Objective test
There was a strong likelihood that the landlord's works would substantially interfere with the tenant's ability to use its remaining premises for the purpose for which they were let. This would mean that the tenant would seek to injunct the landlord, and therefore the landlord could not satisfy the objective limb of the test. This would be a significant impediment to the landlord’s ability to carry out its proposed works to the premises within a reasonable time of the end of the tenancy
The landlord argued that it had a resolute intention to undertake the proposed works and that the threat of an injunction was too remote to prevent it from carrying out the works.
Although the Judge decided that the landlord's case was made out, he did not apply the Franses test to the facts of the case or offer any guidance on why he considered that the landlord's intention was not conditional within the meaning of Franses. Permission to appeal was therefore sought and obtained.
Market interest in the case was significant, given its potential impact on market practices in relation to opposed lease renewal proceedings. Unfortunately, the High Court will now not apply the Franses test to that evidence, and thereby offer some clarity on how Franses should be applied on a practical level.
Both landlords and tenants are likely to try and use the present uncertainty to their advantage. It can only be hoped that a further case will provide guidance on the issue sooner rather than later.
Mark Reading and Isabel Lich acted for the tenant in the proceedings.