When renewing a business lease, the terms of the new tenancy are governed by ss32 -35 of the Landlord and Tenant Act 1954 (the Act). In Davy’s of London (Wine Merchants) Ltd v The City of London Corporation & anr [2004], the Act applied in its unamended form. This was because the tenant’s section 26 request was made before the date on which the changes that were introduced by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 came into force. Section 33 (duration of the new tenancy) and s35 (other terms of the new tenancy) were of particular relevance in this case (see box).

The original facts

Davy’s held premises in the basement and on the ground floor of 120 Fenchurch Street in the City of London, under a lease originally granted for a term of 25 years. It occupied these premises as a wine bar. Evidence would ultimately show that 120 Fenchurch Street was nearing the end of its useful economic life, and that it would require total redevelopment at some stage. However, a major refurbishment would not be viable.

Shortly before the expiry of the term, Davy’s made a request for a new tenancy. The Corporation, the competent landlord, served no counter-notice and so the claim was unopposed.

The parties settled on a term of 14 years but they could not reach agreement on whether there should be a redevelopment break clause and, if so, when it should be exercisable and upon what terms. These were the issues that were put before the County Court judge.

At first instance

HH Judge Cox, sitting in the Mayor’s and City of London County Court, made the following findings on the evidence that was set out before him:

(1)A redevelopment of 120 Fenchurch Street, alone or as part of a larger site, was an obviously reasonable and sensible approach.

(2)The Corporation did not want to carry out the redevelopment itself, and it had negotiated the sale of 120 Fenchurch Street to Developer A. Both parties were committed to the transaction.

(3)Developer A had extensive plans for a comprehensive redevelopment of an island site that included 120 Fenchurch Street, but the process of site assembly would take in excess of three years.

(4)On professional advice, no planning application had been submitted in advance of site assembly.

(5) In a number of years, the economic climate would be such as to make the redevelopment of the island site a practical proposition.

HH Judge Cox then went on to direct himself as follows:

(1) the Court has a power to order the inclusion of a break clause into the new tenancy;

(2) it is no part of the policy of the Act to give security of tenure to a business tenant at the expense of preventing redevelopment;

(3) the landlord needs to establish that there is a ‘real possibility’ rather than a ‘probability’ that redevelopment would take place during the currency of the new tenancy; and

(4) the prospect of redevelopment by someone other than the landlord is not irrelevant.

Having concluded, on the evidence before him, that there was a real possibility of redevelopment during the currency of the new tenancy, and that Davy’s would be compensated by the reduced rent that a break clause would attract, the judge ordered the grant of a new tenancy for a term of 14 years containing a rolling redevelopment break clause operable after five years, on 11 months’ notice.

Both Davy’s and the Corporation appealed.

The intervening events

Shortly before the appeals were due to be heard, and contrary to the assurances given to HH Judge Cox, the proposed sale to Developer Afell through and the Corporation sold 120 Fenchurch Street to Developer B.

The Corporation applied to the Court for permission to adduce further evidence on the appeals, relating to events that had occurred since the date of the hearing before HH Judge Cox. On the basis of that further evidence, the Corporation asked for no order to be made on the appeals, and for the terms of the break clause to be remitted to the County Court.

The further evidence was to the effect that Developer B did not intend to pursue the redevelopment scheme contemplated by Developer A but rather to redevelop 120 Fenchurch Street as a stand-alone scheme as soon as possible.

The application came before the Vice-Chancellor. He adjourned the appeals, directed that Developer B should be joined as a party to the proceedings, gave permission for the further evidence to be admitted, and ordered that, at the resumed hearing of the appeals, the parties were at liberty to argue the relevance of the fresh evidence (see box).

Davy’s then abandoned its appeal, leaving that of the Corporation and (now) Developer B to be heard.

The surviving appeal

This came before Lewison J. Counsel for the Corporation and Developer B advanced two grounds of appeal:

(1)HH Judge Cox had applied the wrong legal test to determine the terms of the break clause. Once he had found that 120 Fenchurch Street was ripe for development on its own, he should have simply acceded to the landlord’s request for a break clause, operable at any time after September 2005, and should not have gone on to consider the scheme that the Corporation and Developer A had in mind.

(2)On the basis of the fresh evidence, HH Judge Cox’s order should be set aside and the Court should order the inclusion of a break clause exercisable on six months’ notice at any time after September 2005.

Lewison J’s reasoning

We should begin with Lewison J’s opening statements. To put counsel’s arguments in context, the judge first of all pointed out that to give effect to HH Judge Cox’s order (allowing for the impact of s64 of the Act), the parties had agreed that the new tenancy should be treated as running from March 2004. This meant that no break notice could be served before March 2009, with the result that the tenancy could not be terminated before February 2010.

Lewison J then went on to say that the proceedings had been advanced on the basis that the Court was exercising a discretion under s35, rather than reaching a decision under s33 of the Act.

The former requires the Court to have regard to the terms of the current tenancy. The latter does not, and leaves the question of reasonableness at large. In his view, the cases did not ‘speak with one voice’ but he left the point open. In any event, HH Judge Cox had followed the approach of the relevant authorities in seeking to strike a reasonable balance between the parties.

He had selected a period that in his estimation would not prevent the redevelopment from taking place or unreasonably delay it. He also had regard to the need to give the tenants a reasonable degree of security of tenure.

In a relatively short order, Lewison J refused the first ground of appeal. He did not accept that HH Judge Cox could be criticised for the order that he had made. He had directed himself in accordance with the correct legal test. He had then tailored the break clause to the scheme that the Corporation had presented to him, and to which Developer A was, at that time, according to the evidence, committed.

However, the second ground of appeal, which hinged upon the fresh evidence, involved more complex issues.

The decision

The threshold question for Lewison J was the extent to which the fresh evidence could be deployed, once the Vice-Chancellor had given permission for it to be admitted.

Counsel for the Corporation and Developer B argued quite simply that both s33 and s35 of the Act refer to ‘all of the circumstances’ and that this must include circumstances that have arisen since the trial date, where evidence of those circumstances is before the Court.

Furthermore, the current tenancy continues by virtue of s64, and it would be wrong to exclude from consideration circumstances occurring during the current tenancy.

Counsel for Davy’s took a much more restricted approach, contending that the fresh evidence could only be deployed in the event that HH Judge Cox’s decision was independently wrong, or unjust because of a serious procedural or other irregularity in the lower Court.

Lewison J found for the Corporation and Developer B on this question, holding that there was no requirement in the authorities on the reception of fresh evidence that the judge should be independently shown to be wrong. There was also precedent in cases arising under the Act for variation by an appellate Court of the judgment of the trial judge, on the basis of evidence relating to post-trial events.

In an application for a new tenancy, the judge is not deciding what happened in the past, but what terms should govern the future. This explains why the Court is more ready to admit evidence of post-trial events in such a case. On this basis, therefore, Lewison J held that the fresh evidence should be taken into account. (It had already been heard by him.)

As a question of fact, the judge then found that Developer B did not intend to proceed with a stand-alone development of 120 Fenchurch Street, but at all times had intended to pursue a redevelopment of the island site.

To that extent, the evidence before the Vice-Chancellor was, in his view, misleading. However, he also concluded on the evidence that, in the event that the island site could not be assembled and redeveloped, Developer B did have a defined fall-back strategy. This was to sell 120 Fenchurch Street to another developer within two to four years, ie between June 2006 and June 2008, for redevelopment. (In the judge’s view this was likely to be closer to the end of that period, no developer having been identified, and no development scheme for 120 Fenchurch Street alone having yet been formulated.) That fall-back strategy had to be taken into account.

Lewison J concluded that the fixed term ordered by HH Judge Cox, ie until February 2010, would impede the fallback strategy of a sale to a developer within two to four years. To that extent, the decision was ‘wrong’ but only in the light of the fresh evidence.

Against that, the business interests of Davy’s had also to be taken into account. A sale could occur as late as June 2008. That would give Davy’s security for a period of three-and-a- half years. He therefore varied HH Judge Cox’s order so as to include a redevelopment break clause exercisable on 11 months’ notice, not to be served earlier than July 2007.

Conclusion

These somewhat tortuous proceedings involved the Vice-Chancellor, two other judges of the Chancery Division and an experienced County Court judge. The net result of the surviving appeal was the advancement by some 20 months of the earliest date on which the landlord might expect to obtain possession.

That aside, we are reminded by this case that the burden on a landlord in these circumstances is much less than that which it will face when it comes to operating the redevelopment break clause, and that the Court is obliged overall to conduct a delicate balancing exercise. Even more usefully, it adds to the authorities on the extent to which evidence of post-trial events can be taken into account in claims for a new business tenancy. What remains unanswered is whether the terms of a redevelopment break clause are governed by s33 or s35 of the Act. Possibly, the better view is that it is s35.

Case references

Davy’s of London (Wine Merchants) Ltd v The City of London Corporation & anr [2004] EWHC 2224 (Ch); (2004) 42 EG 161 (CS)

The Vice-Chancellor’s judgment

'Neither side could honestly and conscientiously advance their existing appeals on the existing evidence because each side would necessarily be advancing a false case to its own knowledge. It seems to me to be quite inescapable that this fresh evidence must be admitted before the Court because the Court cannot conscientiously deal with the appeals on any other basis.

What I do not decide, and that would be a matter for decision at a future occasion, is whether the admission of the fresh evidence would mean that the relevant time for the purpose of deciding whether there should be the grant of a new tenancy and if so, on what terms, should be the hearing by the County Court judge in November 2003 or the date of the hearing before the appellate Court, whenever that is, in 2004.'

Sections 33 and 35(1) of the 1954 Act

Section 33

Where on an application under this Part of the Act the Court makes an order for the grant of a new tenancy, the new tenancy shall be such tenancy as may be agreed between the landlord and the tenant, or, in default of such an agreement, shall be such a tenancy as may be determined by the Court to be reasonable in all the circumstances, being, if it is a tenancy for a term of years certain, a tenancy for a term not exceeding 14 years and shall begin on the coming to an end of the current tenancy.

Section 35(1) of the Act

The terms of a tenancy granted by order of the Court under this Part of this Act (other than terms as to the duration thereof and as to the rent payable thereunder), shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the Court; and in determining those terms the Court shall have regard to the terms of the current tenancy and to all relevant circumstances.

John Martin is director of property law research with Pinsents.  © Property Law Journal