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Landmark case ruling changes relationship between landlords and business tenants, says Herbert Smith Freehills

06 December 2018 | London
Deals and cases

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Responding to news that the Supreme Court in the UK has handed down its judgement concerning the limits on landlords' ability to terminate protected business tenancies on the ground of redevelopment, Matthew Bonye, head of real estate dispute resolution at Herbert Smith Freehills, said:

"The redevelopment ground is by far the most common basis upon which landlords terminate protected business tenancies and until now, landlords, thought they had a winning gambit available to them. Had they wanted to remove a tenant at the end of a lease, they simply had to outline cogent plans for redevelopment, but would not commit to them if the tenant then responded by leaving voluntarily.  They would only commit to doing the work if the tenant dragged them all the way to Court.  With this landmark ruling, the Supreme Court has rallied against any kind of conditionality within the meaning of ‘intention’. Substantial works of development or demolition will need to be carried out whether or not the tenant accepts the landlord’s argument and simply leaves."

Bonye added: "Few tenants would go all the way to Court simply to extract an unconditional promise that specific works would be carried out, preferring to cut their losses and leave. Before today it meant landlords could then be off the hook, without having to commit any further by engaging contractors. This circularity was clearly objectionable in the eyes of the Supreme Court.

According to the Supreme Court's decision landlords now need to demonstrate a fixed intention to carry out development or demolition works, whether or not the tenant leaves. 

Bonye said: "Courts may now be entitled to view a landlord's stated intention to carry out bespoke, but commercially pointless, works with much more scepticism and landlords may not be willing to commit to such an exercise unconditionally.  The consequence may be that more unnecessary works are carried out around the country, because motivated landlords know that this is what they need to commit to when they want to take back possession of a property."

Bonye also made the point that this may affect the dynamic of the widespread litigation that goes with termination of business tenancies.  He concluded: "Tenants will know that they can try to test a landlord, insisting on inspecting internal documentation as part of the Court-ordered disclosure process.  Landlords may prefer not to hand over internal papers and may prefer to do deals favourable to tenants rather than go through that.  Landlords may also choose to grant only tenancies excluded from protection so as to stop any of this arising, but this will adversely affect passing rents: tenants pay more for protected leases."


About Herbert Smith Freehills

Operating from 27 offices across Asia Pacific, EMEA and North America, Herbert Smith Freehills is at the heart of the new global business landscape providing premium quality, full-service legal advice. The firm provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including Banks, Consumer products, Energy, Financial buyers, Infrastructure & Transport, Mining, Pharmaceuticals & Healthcare, Real estate, TMT and Manufacturing & Industrials.

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