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Lease renewal: it’s mine!

26/10/2011

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United Kingdom

A recent battle between two oil giants for the profits from a successful oil terminal has far reaching implications for lease renewals and a landlord’s ability to oppose the grant of a new lease.

This article was included in the Winter 2011 issue of Informer- the real estate newsletter

A recent battle between two oil giants for the profits from a successful oil terminal has far reaching implications for lease renewals and a landlord’s ability to oppose the grant of a new lease.

Cast your mind back to your childhood, or if that's too long ago, think about how many times have you seen your own children playing perfectly happily.  Then one child picks up a toy and is really enjoying playing with it, when the other spots that they are missing out on the fun and tries to snatch the toy away: "I want it" "But George, India’s playing with it now" "But it's mine".

This is what appears to have happened in the case of Humber Oil Terminal Trustee Limited v Associated British Ports.  This time, the argument wasn't resolved by mummy or daddy and a whole lot of tears, but through the Courts by virtue of Ground (g) of the Landlord and Tenant Act 1954.

In 1969, Associated British Ports (ABP) granted Humber Oil (Humber) leases of an oil terminal in the Humber Estuary.  The most important site was an oil jetty that Humber used in order to service two refineries in the area.  The lease enjoyed the protection of the security of tenure provisions of the Landlord and Tenant Act 1954, so Humber were expecting to be able to renew their lease when it expired in December 2009.  In 1995, plenty of time before the renewal date, the parties started negotiating the terms of the new lease.  However, they failed to agree terms.  In 2009, ABP served notice under section 25 of the Landlord and Tenant 1954 to terminate the lease and confirmed that they would oppose Humber's application for a renewal lease on the ground that ABP intended to take over operational control of the terminal.  ABP based their opposition to the lease renewal on section 30(1)(g) of the Landlord and Tenant Act 1954, which states:

"(g) that on the termination of the current tenancy the landlord intends to occupy the holding for the purposes, or partly for the purposes, of a business to be carried on by him therein, or as his residence."

The Court made it clear that the issue in this case boiled down to ABP's actual intention to carry on their own operation at the site. 

Humber's assertions were that ABP's proposal to occupy the property was not economically viable.  Examples were given of the cost of setting up the operation after Humber removed all of its equipment in accordance with the yielding up obligations in the lease; the estimate was £60,000,000 and a time frame of 2 years. Humber therefore argued that ABP should be required to prove that it had a reasonable prospect of being able to viably set up and run the operation which should be viewed independently of the bargaining position they would undoubtedly have if they succeeded in this case (ie they should be put into a position where Humber was not having to pay inflated prices for the use of the terminal following its loss of the lease).

Conversely, ABP requested that the Court assume that if ABP did win the case, then Humber would be able to enter into a new commercial relationship for the provision of the services. 

The Court was conscious that they had to be very careful in speculating as to what may or may not happen in the future.  In reality, as the Court decided, it was unlikely that Humber would not negotiate with ABP for the future supply of services, especially if this operation was the most viable for their business.  However, notwithstanding this possible outcome, the Court decided that even if ABP’s plans were “aspirational or embryonic” this would only be relevant to the intention if ABP was “impecunious or insubstantial” and in this case, ABP was a major port operator with substantial financial backing.  Even without Humber’s business, it would be possible for ABP to carry these intentions through.  Interestingly, the Court stated that it did not need to look at whether that operation was going to be successful or commercially viable, which would be relevant to the assertion that ABP needed Humber’s business in order to make the operation viable.

Perhaps unfairly, the Court considered that the fact that ABP was probably just using ground (g) as a bargaining tool to achieve more favourable terms and a higher rent on the new lease was probably true, but decided that this did not take away from the current intention of ABP to operate from the premises.  Moreover, if the ruling on this case is not overturned on appeal, a landlord can now negotiate freely with the tenant for the grant of a new lease and the tenant cannot use this as a ground to challenge the judgement.

The implications of this case will have an effect on a number of lease renewals, most particularly where the landlord opposes the renewal using ground (f) (redevelopment) and as in this case, ground (g).  This case brings less certainty for the tenant.  Before, it was assumed that the landlord had to show a settled intention that they were either going to redevelop (for example, by producing a planning permission for the development) or to occupy the property themselves.  This case allows the lesser test, merely showing that the landlord is capable of carrying their intention through.

So at the moment, George has managed to get hold of the toy.  However, India does not give up on her toys that easily and the fight is far from over.  The next instalment is coming with the Court of Appeal considering the implications of the Competition Act and the consequential lawfulness of ABP taking the operation over.  Watch this space ………

Article by Denise Sexton, Partner in the Real Estate Practice at Fieldfisher.

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