When can you refuse a bad commercial tenant a new lease?

The court provided useful examples of the sort of conduct that might allow a landlord to refuse a new lease, even though the tenant has security of tenure under the Landlord and Tenant Act 1954 (“the Act”).

The judgment can be found here.

Background

When granting most leases to be used as commercial premises, the landlord and tenant need to agree to follow a special procedure, known as ‘contracting out’, otherwise the tenant’s lease will not end at the end of the period stated in the lease. The lease is continued by law and the tenant has a right to apply to the court for a new lease, if terms cannot be agreed.

The landlord can only end the lease under certain circumstances set out in the Act. The most common are that the landlord wishes to re-construct the property or to use it him or herself.

The landlord will need to prove that this is their intention and also meet certain other criteria. It may also involve payment of compensation to the tenant.

What if the landlord cannot meet the criteria? The idea of paying compensation to a bad tenant who has already cost the landlord money also may not be palatable.

The Act does provide a route to deny a tenant a new lease where the tenant ‘ought not to be granted a new tenancy’ on the basis of:

1. The state of repair of the property, if that state resulted from the tenant’s failure to comply with its repairing obligations in the lease;
2. Persistent delay in paying rent; or
3. Other substantial breaches by the tenant of its obligations under its current tenancy, or for any other reason connected with the tenant’s use or management of the property.

This raises the question of what sort of breaches or other reasons might be serious enough to deny a tenant a new lease.

Each case will turn on its own facts. It can therefore be risky to bring such a case, especially if the landlord has one of the ‘no fault’ grounds upon which it can rely. This means that contested cases in the higher courts are rare and that there is therefore little guidance on the types of situations where the court will deny the tenant a new lease.

The current case

This case concerned points 1 and 3 above. There were a number of issues concerning the way that the tenant looked after the property that led the judge to conclude that the tenant should be denied a new lease.

Whilst each case will need to be considered individually, the case does provide an interesting insight into the types of breaches that may be taken into account and how seriously the court will take them. This is important as the court needs to be satisfied that breaches are ‘substantial’ if it is going to deny a tenant a new lease.

This case related to a property let as stables for training racehorses. There were a number of breaches that the court considered did amount to substantial breaches (whether of repairing obligations or otherwise. These included:

• A number of items of disrepair and the general state of the property. In the words of the judge at first instance ‘the condition of the [Property] in terms of maintenance and repair had greatly deteriorated’
• Covering a paddock with plastic waste material that would cost thousands of pounds to remove.
• A number of alterations and additions to the Property made without the landlord’s consent.
• Sharing occupation of the Property with another business without permission.
• Burning waste at the Property.
• Not insuring the property

Once these breaches had been established, the court then needed to consider ‘whether it would be unfair to the landlord, having regard to the tenant’s past performance and behaviour, if the tenant were to enjoy the advantage that the Act gives him’ – i.e. the right to a new lease.

This is a value judgment to be made by the court, which makes predicting the outcome of individual cases difficult.

In this case, the judge considered that the state of repair alone would be enough to justify refusing a new lease. The judge at first instance was right to take into account that the state of the Property would likely deteriorate during any new lease.

The judge would also have denied permission for a new lease based on the ‘other’ breaches. In particular, the failure to insure was here taken to be very serious, although the judge acknowledged that there could be cases where this is less so. The judge also considered the tenant’s plans for the property and that this would again likely involve sharing or giving up occupation.

The breaches here were serious and numerous and demonstrate how the law can operate to deny a ‘bad’ tenant a new lease. Each case is however unique and whilst this case gives a good indication of the type of matters that may prevent a tenant being given a new lease, it is important for landlords to take advice before seeking to terminate a lease on these grounds.

Key points for landlords and tenants

This case shows the importance of monitoring your tenant’s compliance with the conditions of their lease and good record keeping generally. It also shows how important it is to evidence any issues. If you suspect that your property is deteriorating, the input of a surveyor may be useful to advise and to help document any deficiencies in repair.

For tenants, you need to make sure that you understand your lease obligations and take steps to comply with them. If you do not then even though the landlord may not take overt action at the time, the breaches still might be used against you come renewal.

If you have any questions about this article or your own situation, please do not hesitate to get in touch on York 01904 716000, Wetherby 01937 583210 or Malton 01653 692247.