The Court of Appeal’s decision in Caterpillar Property Ltd v Park Cakes Ltd provides timely clarity on the relationship between contractual renewal options and a tenant’s statutory rights under the Landlord and Tenant Act 1954 (the 1954 Act). In confirming that an unexercised option does not displace security of tenure, the court has reinforced a key point; tenants retain a strategic choice as to how they renew.
For both landlords and occupiers, the decision is a reminder that renewal mechanics must be considered not just in drafting, but in how they operate in practice
Background
Park Cakes Limited (Park Cakes) occupied two commercial premises owned by Caterpillar Property Limited and Caterpillar Property Holdings Limited (Caterpillar). The leases were each granted for 20 year terms set to expire in June 2027.
The leases contained an option for Park Cakes to take further leases of the two premises for further ten-year terms but it decided not to exercise either, citing that the annual rent under the new leases would exceed the market rate.
Instead, Park Cakes sought to rely on its security of tenure under Part II of the 1954 Act, concluding that taking new leases under the security of tenure route would offer a lower annual rent than the rent payable under the contractual renewal options.
Security of tenure: a recap
Where a tenant occupies premises for business purposes and the tenancy is not excluded from the 1954 Act, the lease does not simply end on contractual expiry as the tenant has security of tenure Here, Park Cakes benefitted from two protected leases and could request new leases from Caterpillar.
In general terms, any renewal lease granted under the 1954 Act will be at a market rent (subject to the usual statutory assumptions and disregards).
Section 28 in focus
Section 28 of the 1954 Act contains an important exception: where parties have agreed in writing to the grant of a future tenancy, security of tenure falls away. Landlords have often looked to this provision as a potential mechanism to argue that renewal options displace the Act.
Caterpillar argued that, by virtue of the tenant-only option to call for the two renewal leases, the parties had agreed to the grant of future tenancies for the purpose of section 28, and therefore Park Cakes could not rely on security of tenure pursuant to Part II of the 1954 Act.
No exercise, no agreement
The Court of Appeal dismissed Caterpillar’s appeal, finding that where a contractual option to call for a new lease has not been exercised and the pre-conditions have not been met, section 28 does not apply.
Until the option is validly exercised, there is no binding commitment between the parties to take a new lease.
The court emphasised: “when the option is exercised, everything changes” but, before the option is exercised, there is no obligation on either Park Cakes or Caterpillar to enter the new leases. The court added that the purpose of the 1954 Act is to give protection to business tenants, so the tenant’s perspective is the appropriate lens to consider the issue through.
Practical implications
For tenants, where they enjoy security of tenure in their existing lease, and benefit from a contractual renewal option, they should carefully consider whether to exercise their option or rely on their statutory right to apply for a new tenancy under the 1954 Act.
Tenants should continue to view options to renew as an additional mechanism by which they can extend their occupation, the alternative being applying for a new lease under the 1954 Act.
For landlords, they should not assume that the inclusion of a renewal option will displace security of tenure. If landlords are concerned about this position, they should consider whether to exclude the original leases from security of tenure at the point of grant.
Where an option to take a new lease is mutual or landlord-only, landlords should consider whether to exercise such options to ‘lock in’ tenants.
Equally, if the new lease would result in a below-market rent, landlords may consider not exercising an option in the hope that tenants will pursue a new lease under the 1954 Act or instead remarketing the property.
Preserving tenant choice
This decision preserves a valuable element of tenant flexibility and reinforces the strategic considerations behind lease renewals. Careful consideration should therefore be given at the outset of any lease to how renewal mechanisms are structured and how they may operate in practice to avoid any unwelcome surprises at lease expiry
If you have any questions on the above or require advice in this area, please contact our real estate team.
