How secure is your business tenancy?

Following the recent case of Humber Oil Terminals Trustee Ltd v Associated British Ports [2012] Alexandra Savage, Trainee Solicitor, discusses an unusual argument used in an unsuccessful attempt to prevent the landlord taking possession.

What is Security of Tenure?

A tenant has a statutory right to renew its lease at the end of its tenancy provided that right has not been excluded by the lease and the landlord has not notified the tenant of any opposition. The Landlord and Tenant Act 1954 (LTA 1954) s.30, offers a landlord the following grounds of oppositions to a renewal:

(a) The premises are in disrepair

(b) The rent is in arrears

(c) There are other breaches of covenant

(d) The landlord is willing to provide alternative accommodation which is reasonable having regard to the current tenancy and other relevant circumstances

(e) That the current tenancy was created by the sub-letting of part only of the property comprised in a superior tenancy

(f) That the landlord intends to redevelop the premises which could not be done without gaining possession of the property

(g) The landlord intends to occupy the premises for himself for the purposes of a business or of his residence

The implications of Humber Oil Terminals Trustee Ltd v Associated British Ports [2012]

In this case the ground in question was ground (g) listed above. When that ground is used the tenant is protected by a two stage test confirmed by the High Court in Cunliffe v Goodman (1950) which stops the landlord simply requesting their property back at the end of the contractual tenancy period because they want to occupy it if they are unlikely to be able to do so.  The two stage test is as follows:

1. The subjective element: The landlord must have a firm and settled intention to occupy the premises as their own and have taken practical steps in establishing how this is to be achieved.

2. The objective element: The landlord must have a reasonable prospect of achieving its intention of occupying the premises for a business, in other words, there must not be too many hurdles to overcome, or ‘unknowns’, in the process.

The usual hurdle cited by tenants is the difficulty of the landlord obtaining planning permission for redevelopment or change of use for its own occupation. In Humber Oil Terminals Trustee Ltd v Associated British Ports [2012] a different hurdle was suggested—the necessity of the landlord reaching a separate commercial agreement with the un-cooperative tenant.

Humber Oil Terminals related to the lease of an oil terminal jetty. The landlord opposed the tenant’s application for renewal of the tenancy on the basis that it intended to gain operational control of the jetty. This would end the tenant’s exclusive use of the jetty meaning that they would have to either leave the jetty or come to a commercial agreement with the landlord (some form of licence) in order to be able to continue to use the jetty to supply its refineries. The tenant’s bargaining position in relation to a licence would be substantially weakened because if the tenant did choose to move elsewhere, they would have to remove various pipes and loading equipment which would cost them around £10 million. (Although it would then take the landlord two years to install their own equipment at a cost of around £60 million). If the landlord was able to deny the tenant a lease renewal it would leave the tenant with a stark choice: accept the landlord’s terms for a licence or move elsewhere and suffer the £10m removal costs.

The tenant argued that they would not be prepared to operate as a licensee and that it would be impossible for the landlord to operate (and thus occupy) the jetty without them. They were relying on the objective test and the argument that the landlord couldn’t possibly have any reasonable prospect of achieving its aim of occupying the jetty without the tenant’s co-operation. Applying the objective test, the judge did not accept the tenant’s argument that the landlord would not be able to operate without it as in reality the tenant would co-operate. He decided that economic considerations would prevail and tenant and landlord would in practice co-operate and come to a commercial agreement so that the tenant would continue to use the jetty as the landlord’s licensee. He concluded, therefore, that the landlord did satisfy both tests.

The tenant appealed on the grounds that the landlord did not satisfy the objective part of the two stage test, in that the landlord would never be able to fulfill its intention of taking over control of the jetty without the aid of the tenant because of the infrastructure and expertise that the tenant had in place and, whatever the judge said, the tenant would refuse to co-operate with the landlord.

The appeal was dismissed. The Court of Appeal, applying Westminster City Council v British Waterways Board (1984), held that the judge had to assess the objective element (whether the landlord would be able to occupy for a business) on the basis that the landlord was already in occupation of the premises rather than merely trying to obtain occupation. The appeal court agreed with the judge that the commercial reality was that, on termination of the lease, the tenant, despite its denials, would enter into a commercial agreement with the landlord.

Is there any comfort for tenants?

Grounds (e), (f) and (g) of s.30 LTA 1954 (above) are known as ‘no fault’ grounds as they have nothing to do with the tenant’s behaviour. Where the landlord uses the no-fault grounds the tenant is entitled to claim some compensation from the landlord which is doubled if they have been in occupation of the property with the same business for 14 years or more. If the removal costs are £10m that might provide scant comfort.

What is the significance of this case?

In many cases, the argument over the objective test is whether the landlord is likely to be able to obtain planning permission to redevelop the property or change its use for occupation by the landlord’s business. This is very relevant to whether the Court would hold that, objectively, the landlord had a reasonable prospect of achieving its intention to occupy.

Humber Oil Terminals did not involve planning consent but rather whether the landlord would obtain a commercial agreement with the tenant necessary to achieve its objective. The case tells us that the tenant cannot argue that it would not agree in order to defeat the landlord’s intention, if the reality of the situation is that if the landlord is given occupation the tenant would then probably agree.

If you would like advice on commercial tenancies, you can contact Alexandra by email alexandrasavage@warnergoodman.co.uk or call 02380 717 717.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.