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Franses test goes under the spotlight

Posted on 26 September 2019. Source: Estates Gazette

Franses test goes under the spotlight

The Supreme Court’s decision in S Franses Ltd v The Cavendish Hotel (London) Ltd [2018] UKSC 62; [2018] EGLR 4 sent shockwaves through the property industry when it was handed down last year, but until recently, the new conditional intention test had not been considered by the lower courts. Judgment in the first post-Franses County Court decision, London Kendal Street No 3 Ltd v Daejan Investments Ltd [2019] PLSCS 166, has now been given. The application of the Franses test 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 holding voluntarily. 

Unfortunately, the judgment failed to address this issue and so fails to shed any light on how the new test will be applied in practice. This was a missed opportunity. Subject to any appeal, it will take a further dispute to provide practitioners with much needed substantive guidance on this. 

The facts

The claimant tenant occupies part of a 10-storey building in central London under a five-year lease completed in 2014. The building contains a large basement area, commercial office space and approximately 500 residential flats. In addition to the premises, which the proceedings relate to (the premises), companies forming part of the tenant’s group of companies have been granted three leases of other adjacent parts of the building (the other premises). 

Each of these three leases has a term of 10 years. The tenant uses the premises and the other premises for the purposes of its business as a serviced office provider.

The premises contains facilities such as a kitchen, bathrooms and a large meeting room for use by the tenant’s clients, who occupy the other premises. The defendant landlord served an opposed section 25 notice in relation to the premises, stating their intention to redevelop them to create a separate access into the basement which has been vacant since 2004, and in need of substantial refurbishment. The proposed works necessitate:

  1. The creation of a new entrance into the building through an external wall; and
  2. The installation of a staircase and lift shaft from the premises to the basement (albeit not the installation of the lift itself). 

The test 

Landlords who wish to oppose the renewal of a lease on redevelopment grounds have to satisfy a two-part test. At the date of trial they have to demonstrate: (i) a genuine intention to carry out the qualifying works, known as the subjective test; and (ii) that they are practically able to do such works, referred to as the objective test. The works in question need to be sufficiently “substantial” within the meaning of section 30(1) (f) of the Landlord and Tenant Act 1954, and must be so significant and disruptive that the landlord cannot carry them out while the tenant remains in occupation.

Historically, landlords could satisfy ground (f) by designing a scheme of works with the sole purpose of satisfying the Act. The use of such schemes to remove tenants at the end of their tenancies was commonplace and courts attached no weight to the landlord’s motives or the purpose of the proposed schemes of works. 

Since Franses, landlords now need to overcome an additional hurdle. In order to establish the requisite subjective intention, they must show that they would carry out the same works if the tenant left voluntarily. The new test requires the court to undertake a forensic examination of the landlord’s intention in order to weed out landlords whose intention is conditional in the Franses sense. 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. The judgment suggested that landlords would need to put significantly more thought into designing schemes of works going forward, as well as opening up the possibility for well-advised tenants to leverage their position more effectively. Naturally, the Franses judgment left a number of points open for interpretation, a key one of which concerns the timing of the proposed redevelopment works.

The arguments

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 main arguments were: 

a) Subjective test

The landlord served their section 25 notice terminating the tenancy in March 2017, prior to the decision in Franses. This is significant as the landlord initially chose to “decouple” the works to the premises from a larger scheme, which included works to the basement. It subsequently chose to “recouple” the works once the judgment in Franses was handed down and legitimate commercial considerations for the works became an important factor. The landlord’s changing scheme was evidence of the landlord’s intention to produce a scheme of which the purpose was to overcome the tenant’s claim for a new tenancy. The landlord’s principal witness accepted that the decoupling was planned purely to satisfy ground (f), and that the decision to accelerate the timing of the works would not have been taken if the tenant had left voluntarily.

A further argument was that the landlord had fallen foul of the conditional intention test set down in Franses as, in reality, there was no point doing the basement works until (i) planning permission for a change of use of the basement has been obtained; and (ii) a tenant for the basement had been found whose specifications for the premises (eg in relation to the lift) were known. The timing of the works was therefore 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.

b) Objective test

The leases of the other premises do not expire for another four years. The landlord had not taken reasonable steps to mitigate the impact of the works to the premises on the other premises. In the event the landlord did establish that it intended to undertake its proposed works (and commenced these), there was a strong likelihood that those works would substantially interfere with the tenant’s ability to use the other premises for the purpose for which they were let; particularly if the works were to be carried out in the same disruptive fashion in which the landlord had previously carried out works to the basement in 2017/18. The landlord had only ceased these previous works when the tenant had threatened to issue injunctive proceedings. 

The tenant’s ability to seek and obtain injunctive relief in its capacity as occupier of the other premises 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 (usually within one quarter of the termination date).

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. 

The decision

Judge Saunders interpreted the Supreme Court’s decision as having added a separate and distinct third limb to the test that landlords need to satisfy ground (f), the aim of which is to examine whether the landlord’s real motive in carrying out the works was to remove the tenant “as distinct from some ordinary commercial reason”.

Although Judge Saunders came to the conclusion that the landlord’s case and “the intention set out in Franses” was made out, he did not apply the Franses test to the facts of the case or offer any guidance on why, in the light of the landlord’s own evidence, he considered the landlord’s intention was not conditional within the meaning of Franses, beyond stating that. “There is evidence of a subsisting intention (albeit at times the level of activity has changed).” 

It may be that Judge Saunders based his decision on the fact that, in contrast to Franses, the landlord’s scheme had an accepted commercial benefit. The question of whether the timing of the works was (a) wholly dependent on the need to satisfy ground (f) and (b) commercially sensible was, however, wholly disregarded. It is the writers’ view that this was a fundamental factor in assessing the conditionality or otherwise of the landlord’s position. Unfortunately, the County Court’s decision leaves many questions unanswered and permission to appeal is being sought. If permission is granted it is hoped that the High Court will address the relevant evidence, apply the Franses test to that evidence, and thereby offer some clarity on how Franses should be applied on a practical level.

The conditional intention test is likely to be the subject of much litigation over the coming years. Until the application of the test to facts such as these has been clearly determined either on appeal or in a different case both landlords and tenants will likely try and use the present uncertainty to their advantage.

This article was written by Managing Associate Mark Reading, Associate Isabel Lich and Caroline Shea QC, Barrister at Falcon Chambers. They acted for the tenant in London Kendal Street

Read the full article published on Estates Gazette here.

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