Section 25 notices & partial re-development (Part 1: Vacant Possession)

When the contractual term of a protected business tenancy comes to an end, the landlord might wish to either end or renew the lease by serving a section 25 notice on the tenant in accordance with the Landlord & Tenant Act 1954.

This two-part blog examines some issues that might arise when serving a section 25 notice for a new lease where the landlord wishes to re-develop part of the property.  For a more general overview, see our Practice Note Bringing a business lease to an end and associated precedents, and also our overview on Redevelopment.

Scenario

Imagine a scenario where a tenant occupies the ground and first floors under a lease, with the first floor being let to a sub-tenant on an assured shorthold tenancy (AST).  The landlord serves a section 25 notice with a proposal for a new lease.  However, due to the proposed re-development of the building, the new lease includes the ground floor only.

Must the tenant provide vacant possession?

A key issue where redevelopment is involved is ensuring vacant possession and - in this particular situation - a question arises: 'Is the tenant required to provide vacant possession of the sub-let first floor?'

The answer will depend on the terms of the lease.

If the tenant lawfully granted the AST, and is not under a specific obligation to terminate any underleases and yield up with vacant possession, then the tenant will not need to do so. However (as noted in our Practice Note Yielding up and vacant possession) most modern leases contain an express obligation requiring the tenant to give up possession at the end of the lease.

Even where not expressly required it is considered that the tenant is nevertheless under an implied obligation in this regard (see Practice Note Vacant possession).

What happens if the tenant fails to comply with an obligation to yield up with vacant possession?

Where vacant possession is required and the tenant fails to comply, the landlord will be able to issue a claim for damages. These may include:

• damages for delay to its development scheme;
• compensation for lost rent during the period the subtenant remains in occupation; and
• any costs incurred in obtaining possession from the subtenant.

Our Practice Note What happens to an underlease on termination of the lease? explains that if the tenant lawfully granted  the AST, then (by virtue of s.18(1) of the Housing Act 1988) the AST will continue and the landlord will become direct landlord of the subtenant.

The landlord would then need to terminate the AST under the statutory regime.  For more information see our practice notes Terminating an assured shorthold tenancy, Seeking possession of an assured shorthold tenancy (AST) – s 21 procedure and Seeking possession of an assured shorthold tenancy (AST) – s 8 procedure, as well as commentary at Claims to the Possession of Land paragraph C3.18.

Click here for Part 2 of this blog which deals with the issue of statutory compensation for part of the property the tenant is giving up.