The Times published a fascinating article this weekend highlighting a new trend amongst retailers who are acquiring overriding leases of their competitors’ buildings or simply purchasing the freehold from the current landlord.
By default, business tenants benefit from “security of tenure” under the Landlord and Tenant Act 1954. Unless the parties have agreed to exclude the provisions of the Act, the tenant has an automatic right to call for a renewal lease at the end of the term.
The landlord is only entitled to oppose this request on a limited number of grounds. The part of the 1954 Act which is referenced by The Times article is ground (g), known as “the own occupation” ground.
In other words, if the landlord wishes to use the premises for its own occupation or business, it is entitled to resist the tenant’s request for a renewal lease. Something which the article fails to mention is that a landlord cannot currently rely on ground (g) if it has held its interest in the premises for fewer than five years. Therefore, those adopting this tactic will be looking to strike with landlords well in advance of the lease expiry date. In the case study mentioned, M&S acquired an overriding lease almost 6 years from the expiry of the lease to Wickes.
There will be a limited number of businesses able to afford to deploy these tactics. As well as the costs of acquiring the freehold or an overriding lease, the new landlord will also need to pay compensation to the affected occupational tenant. This is a multiple of the rateable value of the property.
For retail occupiers who are concerned about being on the receiving end of such tactics, consider getting ahead of the issue and opening up discussions with the landlord well in advance of lease expiry. Consider re-gearing the lease to extend the term, or entering into a reversionary lease to take effect once the current lease expires. As with so many portfolio management matters, the importance of taking prompt advice from a professional cannot be understated.
“a handful of the country’s biggest retailers are finding increasingly aggressive ways to grow. As well as signing these intermediary leases, some are also buying the freeholds to their rivals’ shops for the same purpose: to be able to move themselves in when the lease expires.”