Facts

B&M was the tenant of a large warehouse style unit with a garden centre in Willesden.

In anticipation of B&M’s 20 year lease coming to an end in 2020, the landlord – HSBC - entered into an agreement for lease with Aldi, which required Aldi to carry out substantial works to take the building right back to its steel frame and reconstruct it as two units.

HSBC tried to terminate B&M’s lease in 2020 by serving a notice under Section 25 of the 1954 Act on the redevelopment ground. However, as this took place during the coronavirus pandemic, HSBC was unaware that B&M had already served a notice requesting a new lease under Section 26 of the 1954 Act, and HSBC was now out of time to oppose it.

HSBC therefore agreed to grant a new lease, but wanted the terms of that lease to reflect its development plan and proposed an 18 month term, with a landlord’s redevelopment break exercisable immediately on 6 months’ notice, rather than the 10 year term B&M had requested.

Should there be a redevelopment break clause?

Both parties agreed that HSBC had a genuine intention to carry out the redevelopment, and the court considered that there was a “real possibility” that planning permission would be granted.

B&M argued that HSBC’s intention to redevelop the property shouldn’t trump its own need for security, and the court should carry out a balancing exercise – with its own security of tenure paramount.

The court disagreed, and said that HSBC’s redevelopment plans should be given greater weight:

“the court will only upset a landlord’s redevelopment ambitions if there is a major factor which points the other way and, whilst the Claimant is correct in that a balancing exercise has to be undertaken, if anything, it is trumped (to a large extent) if a landlord wishes to develop”.

The parties both agreed that the property was “old and tired” and the court agreed that the rent under a 20 year lease to Aldi would be much higher than a 10 year lease to B&M, and would enable HSBC to match the income from the property to its pension fund liabilities.

The court gave short shrift to B&M’s argument that it would be particularly affected by losing its store to a competitor, and was clear that the 1954 Act is not designed to inhibit competition.

The court also dismissed B&M’s argument that closure of the store would result in job losses, as the redevelopment would create two units and arguably more job opportunities.

The Court therefore agreed that a break clause should be included in the lease.

When should the break be exercisable?

Having determined that a break clause would be included in the lease, the Court had to decide whether it should be exercisable immediately, as HSBC requested, or after five years, as B&M requested.

While the agreement for lease with Aldi required HSBC to secure vacant possession of the property by 3 February 2025, Aldi had indicated informally that it may be willing to extend that until 2029, albeit on worse terms (HSBC would be required to provide a much longer rent free period).

B&M therefore argued that HSBC would not lose the opportunity to redevelop if the break clause was exercisable in the fifth year of the lease (in 2028).

The Court noted that the property would need to be redeveloped at some point. Delaying that redevelopment benefited B&M (who had already enjoyed an additional two years in the property during the proceedings), at the expense of HSBC, as the terms under the Aldi lease would be less advantageous at that time.

While Aldi had informally indicated it may be willing to agree an extension under the agreement for lease, the court noted that nothing was formally agreed, and to avoid prejudicing HSBC’s position, decided that the break should be exercisable immediately on 6 months’ notice.

Term of the Lease

Having included an immediate break right, the court acknowledged that the term of the lease was less significant, however, it was still important to B&M in the event that HSBC did not succeed in its development plans (for example, if it did not secure planning permission, or the agreement for lease with Aldi fell away).

The court considered the length of the current lease, and what term would give B&M some security and the ability to onward plan, whilst still giving HSBC protection against reducing asset values, and its need to offset its liabilities by maintaining income from the premises.

The court therefore granted a term of five years.

What does this mean for landlords and tenants?

The facts of this case are unusual, as a landlord planning to redevelop immediately will normally oppose the grant of a lease, rather than insist on the inclusion of an immediate break right.

However, it provides helpful guidance on the balancing act the court must carry out in determining disputed lease terms, and indicates that, where a landlord has a firm plan to redevelop the property, the court will not stand in its way.

Where a landlord’s plans are not immediate, the court may include a break exercisable at a later stage, but it will not impose lease terms which would thwart or delay established development plans.

The case gives a very clear message that a landlord’s redevelopment plans “trump” a tenant’s wish for security.