Lease renewals: does the new lease have to include a break clause?

Renewals of Business Tenancies

If a business tenancy is protected by the Landlord and Tenant Act 1954 (“the 1954 Act”), the tenant will have the right to remain in the property beyond the fixed contractual term. This means the tenancy will continue on the same terms as the current lease until the lease is renewed or ended under the 1954 Act.

All tenancies in England benefit from the protection of the 1954 Act unless the parties agree to ‘contract out’ and follow the strict procedure for doing so.

Landlords to a 1954 Act tenancy have two options at the end of the contractual term; (1) end the current lease and make proposals for a new one or (2) oppose a new lease.

In both cases landlords need to serve a notice under Section 25 of the 1954 Act giving tenants between 6-12 months’ notice at the end of the contractual term.

If landlords want to offer a new lease, the proposed terms should be put in the notice.

If the landlord does not want to offer a new lease, it will need to rely on one or more of the statutory grounds of opposition set out in Section 30 (1) of the 1954 Act. The most common of the grounds is Ground (f) where the landlord intends on redeveloping the property.

Tenants also have a right to ask their landlord for a new lease when the contractual term ends. Tenants can serve a notice on their landlord with proposals for a new lease under Section 26 of the 1954 Act. Tenants need to give their landlord between 6-12 months’ notice at the end of the contractual term.

If the landlord objects to there being a new lease, it can serve a counternotice within 2 months of receiving a Section 26 notice. Again, a landlord will need to rely on one of the grounds of opposition in a counternotice.

If either a Section 25 notice (proposing a new lease) or a Section 26 notice is served, in practice the landlord and tenant will enter negotiations for a new lease. If the parties cannot reach an agreement, either party has the right to issue court proceedings asking the court to determine the terms of the new lease.

Break Clauses in Lease Renewals

If court proceedings are issued, the court will make an order determining the terms of the new lease. The court’s power is limited by the 1954 Act.

Under Section 35 of the 1954 Act, the court has the power to make an order on the “other” terms of the lease (being terms not in relation to rent or the length of the lease). This section gives the court the power to decide whether the new lease will contain a break clause.

The court will consider the terms of the existing tenancy and “all relevant circumstances” when making an order on the other terms of a new lease.

How will the court decide if a break clause should be included? What are the “relevant circumstances” which the court will consider?

In the recent decision of Kwik-Fit Properties Ltd v Resham Ltd | [2024] EWCC 4, the court did not order the new lease to have a break clause, despite the tenant’s request for one to be included. The tenant (Kwik-Fit) argued a break clause was in line with its company policy and in line-with current market practices. The court held the inclusion of a break clause was not fair and reasonable as it would allow Kiwk-Fit the right to break the lease without a particularly good reason, damaging the landlord’s reversionary interest. The court commented that paying a higher rent was not capable of compensating the landlord for its loss. This meant the inclusion of a break clause was not fair and reasonable.

In the Kwik-Fit case, the judge helpfully summarised what the court will consider when looking at what “other” terms of the lease should be ordered. HH Judge Davis-White KC stated as follows:

1. “The Court must first consider the terms of the existing tenancy;
2. The burden of persuading the court to impose a change rests on the person proposing the change;
3. The change must be fair and reasonable;
4. There must be a good reason, based on fairness, to impose the proposed new term;
5. Otherwise the discretion is wide;
6. The LTA 1954 is not intended to “petrify” the terms of the existing tenancy: in some cases, especially where the lease is an old one, the existing term sought to be substituted may be out of date or unsuitable.”

The Cinema may find it difficult to rely on the Kwik-Fit judgment however. Zedwell is looking to include a redevelopment break whereas Kwik-Fit’s proposed break clause was to allow the company to retain flexibility, not for any other reason linked to the interest in the property.

In reality there is a balance for the court to consider. Ground (f) provides landlord with a right to redevelop the property and end the lease so there is a statutory remedy where landlords want to develop the property. On the other hand, tenants have a right to remain in the property under the 1954 Act so they are entitled to a new lease and security to remain in the property.

As stated above, the burden lies with the person seeking the break to convince the court that it is fari and reasonable for it to be included. Whether Zedwell can convince the court to order a redevelopment break will depend on the evidence it can produce. The starting point which the court will consider is the terms existing lease. The court will often consider whether a redevelopment is reasonably possible (for example if planning permission would be achievable). Even if Zedwell can show a redevelopment is possible, this will not necessarily outweigh the Cinema’s interest in the property and tenancy.

It is worth noting that under Ground (f) landlord have to pay tenants statutory compensation. Whether or not Zedwell had offered to pay any compensation to the Cinema on breaking the new lease may also be an important factor.

How we can help

Negotiations for the terms of a new lease can be difficult where the landlord and tenant have competing interests. If you need assistance with a lease renewal please get in touch. We can assist with lease renewals from negotiations through to court proceedings if necessary.