Redevelopment Break Clauses

Redevelopment Break Clauses

Published:

Author: Natalie Aldread

If a landlord is considering redeveloping premises but cannot yet make out the redevelopment statutory ground of opposition set out in section 30(1)(f) of the Landlord and Tenant Act 1954, all is not lost - a redevelopment break clause could be an option

What do landlords have to prove to be entitled to such a clause?

For the courts to grant the inclusion of a redevelopment break clause, landlords have to demonstrate that there is a real possibility that redevelopment of the premises will take place during the term of the renewal lease.

This is a much less onerous test than that of opposing renewal on redevelopment grounds, and the test may even be fulfilled without any evidence of specific plans. It could just involve evidence showing the likelihood of obtaining planning permission or architect's drawings of proposed schemes.

What will the notice period be and will the redevelopment break clause be fixed or rolling?

The courts usually grant a clear period of time before the redevelopment break clause can be operated, allowing the tenant to continue its business from the premises for a guaranteed amount of time.

The courts have consistently awarded rolling redevelopment break clauses on notice periods of anything from six months.

How are tenants' interests protected?

The interests of tenants are safeguarded by the fact that the new tenancy will be granted with the benefit of security of tenure.

Even with a redevelopment break clause, once a hostile section 25 notice has been served, the landlord will still have to prove intention to redevelop in the usual way and, if successful, pay statutory compensation to the tenant.

Is there an impact on rent?

The presence of a redevelopment break clause introduces uncertainty for the tenant, as it does not know how long it will continue to be able to run its business from the premises. This uncertainty is often addressed by a reduction in the rent payable for the premises.

Tenants can therefore benefit from a reduced rent which, if the landlord does not exercise the break clause, will apply for the remainder of the term (unless reviewed). Landlords should therefore be cautious about seeking to include redevelopment clauses in leases, as they will need to balance a desire for flexibility against a decreased rental stream for the length of the renewal lease.