Opposing commercial lease renewals - Youssefi v Mussellwhite

Posted: 03/11/2014

The recent Court of Appeal decision in Youssefi v Mussellwhite [2014] provides helpful guidance to commercial landlords opposing lease renewals on the grounds set out in s.30(1)(a)–(c) of the Landlord and Tenant Act 1954. It is now clear that ground (c) is broader than grounds (a) or (b) and landlords should carefully consider this ground when opposing lease renewals. 

Commentary

Several key points emerge from the Youssefi ruling:

• S.30(1)(c) is, clearly, broader in scope than s.30(1)(a) and (b). In the future, landlords should consider carefully whether this ground can be relied upon in opposed lease renewals.
• The court will ask whether, if a new lease is granted, the breach is such as will prejudice the proper interests of the landlord. To establish "prejudice" a landlord does not need to show any adverse impact on rental or capital values.
• Lease renewals can be resisted where the tenant is in substantial breach of the terms of the lease. What is "substantial" is a question of fact in each case but the breaches should not be trivial. Accordingly, in order to oppose a new letting on ground (c), a landlord does not always need to show that there are "substantial" (or any) tenant breaches. The landlord can still object to the lease renewal if there are other persuasive reasons why a new tenancy ought not to be granted. In Horne & Meredith Properties Ltd v Cox [2014], the landlord successfully made out ground (c) because there was a 16 year history of the tenant starting vexatious litigation against the landlord.
• Unlike ground (a), the first limb of ground (c) is not limited to the "holding". The 1954 Act defines the "holding" as the part of the premises the tenant occupies for the purpose of its business. Accordingly, if a breach occurs in any part of the demised premises which does not qualify as part of the "holding" (for example, in an area that is sublet) the landlord is still entitled to rely on ground (c) to oppose a lease renewal.
• Grounds (a)–(c) are discretionary. This means that, even if the ground is made out, the court can still decide to grant a new tenancy. It is up to the tenant to show that a new lease should be granted. A broad range of factors can be taken into account when exercising the court’s discretion including:
• all the circumstances connected to the breach;
• the conduct of the parties concerning the breach;
• what is likely to happen if a new tenancy is granted; and
• what landlord protection provisions could be included in the new lease.
• Under the second limb of ground (c) the tenant’s previous behavioural history can also be taken into account (this does not need to be connected to a breach). Landlords can use this to their advantage to persuade tenants to comply with the terms of their lease. For tenants, this is all the more reason to ensure that they are not in breach when applying for a lease renewal.

Background

A business tenant whose tenancy falls within Pt II of the 1954 Act (and thus has statutory protection) can apply for a new tenancy under the Act. A landlord who does not want to grant a new tenancy must establish one of the seven statutory grounds set out in s.30(1)(a)–(g) of the Act. This case concerned the first three grounds. Broadly, these are that the tenant "ought not to be granted a new tenancy" because of:

• the breach of the tenant’s repairing obligations relating to the holding—ground (a);
• the tenant’s "persistent" delay in paying rent—ground (b);
• other "substantial" breaches of the tenant’s lease obligations—first limb of ground (c); or
• for any other reason connected with the tenant’s use or anagement of the holding - second limb of ground (c). 

Facts

The tenant held a 1954 Act protected lease of commercial premises. Under the lease, the tenant was only liable to repair the interior of the premises (the landlord being responsible for the structure and exterior). At the end of the term, the tenant applied for a new lease. The landlord opposed the tenant’s application on the following s.30(1) grounds:

• there was a breach of the tenant’s repairing covenants because the rear external wall of the premises was covered by overgrown ivy, making it impossible for the landlord to assess the state of the wall (ground (a));
• the tenant had been persistently late in paying rent (ground (b)); and
• the tenant had breached both the tenant’s covenant to allow the landlord access to the premises (to view their state and condition) and the user covenant under the lease (ground (c)).

First instance decision

At first instance, the court held that the tenancy should be terminated on the basis of breach of both the repairing and access covenants (ground (b) was not made out). The judge decided that, although failure to control the ivy was not a direct breach of the tenant’s repairing covenant, the tenant had failed to comply with its implied covenant to use the premises in a tenant like manner. The judge also agreed with the landlord that the tenant had breached both the user covenant (by not opening a retail business as required by the lease) and the landlord’s access covenant (there being a history which demonstrated "a long-standing intransigence" on the part of the tenant to afford the landlord access to the property).

Court of Appeal ruling

On appeal, the Court of Appeal considered whether the first instance judge had applied the correct tests when considering the s.30(1)(a)–(c) grounds of opposition. The Court concluded that, when considering whether a tenant "ought not to be granted" a new tenancy, the court has to ask itself "whether, looking forward to the hypothetical new term, the proper interests of the landlord would be prejudiced by continuing in a landlord/tenant relationship with this particular tenant." Lady Justice Gloster went on to observe that, in order to demonstrate that his interests are "prejudiced", the landlord does not have to show that the "relevant breach adversely affects the rental income or the value of the reversion". 

Ground (a): failure to repair

In deciding the above question, the Court of Appeal held that ground (a) requires the court to focus exclusively on the state and repair of the holding. The court can have regard to the tenant’s past behaviour but only in relation to its repairing obligations. 

Ground (b): persistent delay in paying rent

Ground (b) should be approached in a similar way to ground (a). The court needs to "focus on the persistent delay in paying rent which has become due and nothing else". 

Ground (c): other substantial breaches or any other reason

In relation to ground (c), the Court of Appeal held that the approach was broader. A court was entitled to focus on both:

• "substantial breaches" (other than disrepair and non-payment of rent); and
• "any other reason connected with the tenant’s use or management of the holding."

Applying the above principles, the Court of Appeal declined to grant a new tenancy to the tenant. They disagreed with the first instance decision on the disrepair point. Ground (a) had not been established because there was no breach of the tenant’s repairing obligation. The "holding" did not include the external wall. The tenant was only required to repair the internal parts of the premises and there was no implied covenant to deal with the ivy (there being an express landlord’s covenant to maintain the exterior of the premises). However, they upheld the decision of the judge at first instance in relation to ground (c).

This article was published in the Landlord and Tenant Review in October 2014.

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