Break clauses in lease renewals under the Landlord and Tenant Act 1954 (the “1954 Act”)

The recent case of Kwik-Fit Properties Ltd v Resham Limited focuses on the challenges that landlords and tenants face when negotiating lease renewal. This case offers an important insight into how the courts address the question of whether break clauses should be incorporated into renewal leases and the courts’ approach to maintaining fairness whilst adhering to statutory requirements.

Facts of the case

The tenant, Kwik-Fit Properties Ltd (Kwik-Fit), ran an auto repair and servicing centre under a 25 year lease that was coming to an end. The lease did not contain break clause. As per their statutory right, Kwik-Fit sought a renewal lease from the landlord, Resham Limited (Resham).

One of the main issues in the renewal negotiations was whether the renewed lease should include a break clause. Kwik-Fit sought a 15 year lease term with a tenant only break clause exercisable at years 5 and 10. Resham sought a 15 year lease with no break right.

Kwik-Fit argued that the break clause was critical for their business flexibility as this would allow them to adjust to changing business conditions and potential shifts in demand. Resham , however, opposed the inclusion of the break clause, arguing that it would devalue the property and affect their long-term investment strategy.

A reminder of 1954 Act, and Section 35

The 1954 Act  provides security of tenure to business tenants, allowing them to renew their lease under certain conditions, subject to agreement on the terms of the renewal lease.

Section 35 of the 1954 Act states that the court may determine the terms of a renewal lease, which should generally be “such terms as may be agreed between the landlord and the tenant.” However, where agreement cannot be reached, the court has discretion to decide on what constitutes reasonable terms, taking into account the interests of both parties.

In particular, Section 35(1) states that, in cases of disagreement, the court should determine terms that are “fair and reasonable” in light of the parties’ interests and the current lease terms. The courts have traditionally interpreted this provision with caution, often weighing the original lease terms as a reference point while considering any proposed changes or additional clauses, such as a break clause.

The court’s approach

The court examined whether a break clause should be included in the renewed lease. The decision to include it turned on several key factors:

1. It was for Kwik-Fit to demonstrate the 5 yearly break right was fair and reasonable.
2. The court applied a similar test where a landlord seeks a redevelopment break right, namely whether there is a ‘real possibility’ of there being a need to terminate because of the premises becoming unsuitable for the tenant’s business;
3. In that regard, the court found that the matters Kwik-Fit relied on did not apply to the premises but instead simply reflected Kwik-Fit ‘s desire to retain maximum flexibility. For example the court was not persuaded by Kwik-Fit’s ‘policy’ of always seeking 5 year break rights, not least because the court found that the policy had not strictly been followed.
4. Whilst the financial damage to a landlord’s reversion flowing from a tenant’s break right may be compensated by higher rent, it was not a positive factor for ordering the break right. There needs to be a good reason and all factors must be considered.
5. The court also noted that it was unfortunate that both experts strayed from giving expert evidence, to giving their assessment of the factual position, which was a matter for the court.

Considering all factors, the court declined to order the tenant a break right.

Key takeaways

This case serves as a reminder that courts will carefully consider the competing interests of landlords and tenants in renewal lease disputes under the 1954 Act.

When seeking a break right it is important to rely on matters which relate to the subject premises and in particular, why there is a real possibility that those premises will become unsuitable. A generic need for flexibility or non-property specific evidence will not fly.

Similarly, when acting for landlords, whilst the onus is on the tenant to show the break is fair and reasonable, it is prudent for the landlord to have his own evidence to show why the change is unreasonable .

If you have any questions about the topics raised in this article, please get in touch.