When to put on the Breaks? High Court considers the viability of an immediately operable redevelopment break clause

The High Court has upheld the decision of a Trial Judge to impose an immediate redevelopment break clause in a business tenancy renewal in the matter of B&M Retail Ltd v HSBC Bank Pension Trust (UK) Ltd [2023].

HSBC (the landlord) owned land comprising a standalone retail warehouse with an external garden centre, car park and service yard.

In January 2021, B&M (the tenant) sought a renewal lease from HSBC. The existing lease expired in December 2020, but the tenancy continued under Section 24 of the Landlord and Tenant Act 1954. The Section 26 notice requesting the grant of a renewal tenancy served by B&M was not received by the correct person at HSBC due to an error in the post room HSBC had used during the pandemic, and consequently no counter notice was served within the 2 month statutory deadline (which expired in March 2021).

In February 2021, HSBC entered into a conditional agreement with Aldi for a lease of the site which included the retail unit occupied by B&M, and which obligated Aldi to carry out substantial demolition and construction works to the site before February 2025.

In May 2021, HSBC sought to serve a Section 25 notice to terminate the lease with B&M, however, this was not effective due to the previous service of B&M’s Section 26 notice. It was at this point that HSBC realised the error in the post room.

In July 2021, B&M issued a Part 8 Claim for the grant of a new tenancy for a 10 year term. HSBC proposed instead an 18 month term with a landlord’s redevelopment break clause to be operable immediately on 6 months’ notice.

B&M’s position at trial was that there should be no redevelopment break clause but that, if the Court disagreed, the break clause should not be operable before the fifth year of the 10 year term.

At the hearing, the trial Judge determined that the redevelopment break clause should be exercisable for the following reasons:

• Aldi might consider moving elsewhere if they could not enter into a lease by February 2025.
• The premises were ‘old and tired’.
• HSBC would suffer financially if the longstop date was extended past February 2025.
• The Aldi lease was of greater value to HSBC than continuing the B&M lease.
• The impact on the wider community of B&M closing its outlet would be lessened as more jobs will be created by the proposed new retail space.
• Few steps had been taken by B&M to find an alternative site in the local area.

Ultimately the trial Judge took the view that the prejudice to HSBC’s development plans as well as the potential financial losses which would have been caused if the agreement with Aldi was lost, weighed in favour of granting the redevelopment break clause immediately. The trial Judge therefore determined that there should be a renewal lease with B&M for a term of 5 years with a rolling redevelopment break clause exercisable immediately on six months’ notice.

B&M appealed the decision on the basis the Judge essentially misdirected himself. It argued that to allow the immediate service of the redevelopment break notice would defeat the purpose of the provisions contained within the Landlord and Tenant Act 1954, which is intended to give the tenant a reasonable degree of security of tenure.

The High Court dismissed the appeal and determined the trial Judge directed himself in accordance with the correct legal test. The High Court acknowledged the trial judge made comments which “might have been better expressed” and admitted that he “overstated things in rejecting the argument” but pointed out that the trial judge was aware there was a balancing exercise which was applied. The High Court stated that “it is important to consider not just the way the Judge expressed himself, which was not entirely consistent, but also what he then did” and explained that the trial Judge had gone through various factors for and against the inclusion of the redevelopment break clause and balanced the interests of B&M having security of tenure against the competing interests of HSBC redeveloping as soon as possible.

In his concluding remarks, Mr Justice Miles noted that:

“The question is not whether I would have reached the same conclusion as the Judge. It is whether he erred in principle or went beyond the wide range of decisions which rational people could reach. I do not think that he went wrong in either sense.”

Summary

This case is a good example of where a landlord has managed to assert its redevelopment rights over a tenant’s right to security of tenure. It also sends a powerful signal that some Judges are prepared to give more weight to the practical realities which may arise and the Courts have extremely wide discretionary powers in such matters - they are seemingly not afraid to flex their muscles when it is considered necessary. Key in this case is that the trial Judge gave considerable weight to the fact that the landlord had well developed plans for the development, which was demonstrated by the agreement for Aldi to undertake significant construction works, as well as the fact that HSBC had already applied for planning permission. The trial Judge clearly saw this as an important factor, and it is debatable as to whether the same outcome would have been reached if there had not been material progress on the plan for development and if the landlord (as is sometimes the case) was only seeking the break clause because there was a chance of a better offer on the table. In any event, what is important to remember is that being able to demonstrate the parties’ intentions will play a role, perhaps even decisively, in the Court’s determination of the case.

The Hamlins Real Estate Disputes team has expertise in both commercial and residential matters. We seek to obtain the best outcome possible for every client, no matter how big or small the issue may be. If you would like a conversation to find out how we might help you, please get in touch.