If your commercial lease contains an option to renew, you might assume that is all the protection you need. After all, you have a contractual right to insist on a new lease – why would you need the Landlord and Tenant Act 1954 as well? As B P Collins’ property disputes team explains, the recent County Court decision in Park Cakes Limited v Caterpillar Property Limited & Caterpillar Property Holdings Limited gives a clear answer: an option and a renewal right under the 1954 Act are two different things and having one does not mean you have given up the other.
Security of tenure under the Landlord and Tenant Act 1954
Part II of the 1954 Act gives business tenants the right to remain in occupation when their lease determines and to apply to the court for a new tenancy on reasonable terms. The landlord can only oppose the grant of a new lease by establishing one of the statutory grounds under section 30(1) – for example, ground (f), redevelopment. The 1954 Act cannot be excluded without going through a formal warning and declaration procedure prescribed by section 38A.
Section 28 of the 1954 Act creates an important exception. Where the landlord and tenant have already agreed in writing on the grant of a future tenancy – a specific new lease, on agreed terms, from an agreed date – the 1954 Act steps aside. The logic is straightforward: if the tenant already has an enforceable agreement for a new lease, the statutory machinery for renewal is unnecessary.
The question before the court in Park Cakes was whether a tenant’s option to renew is the same thing as an “agreement for the grant of a future tenancy” for the purposes of section 28. The landlord argued that it was, with the result that the 1954 Act had never applied to the tenancies at all. The tenant disagreed. The court found for the tenant.
What happened in Park Cakes
Park Cakes Limited held leases of two commercial premises due to determine in June 2027. Each lease contained an option to renew in clause 7.2: if the tenant gave not less than twelve months’ notice after year seventeen of the term, the landlord was obliged to grant a further ten-year lease on the same terms. The landlord argued that this option engaged section 28 and permanently excluded the 1954 Act, meaning Park Cakes had no statutory renewal rights at all.
District Judge Bond rejected the landlord’s argument. His reasoning turned on a fundamental point about the nature of an option: at the moment it is granted, neither party has committed to the grant of a new lease. The landlord is under a contingent obligation – it must grant a new lease if the option is properly exercised, but until then it is not bound to do anything. More importantly, the tenant has made no commitment at all. It has simply reserved the right to require a new lease if it chooses to exercise the option in the future. That is not an agreement for the grant of a future tenancy. It is an agreement for the right to require one.
Section 28 is only engaged when the option is actually exercised. At that point the parties enter into a binding bilateral agreement – the landlord is committed to grant and the tenant is committed to accept – and section 28 properly applies. Until that moment, the 1954 Act remains fully in force.
Why the 1954 Act’s safeguards matter
District Judge Bond reinforced his conclusion by reference to the policy behind the 1954 Act. The Act allows parties to agree that its protections will not apply, but only if they follow the formal procedure in section 38A. The prospective landlord must serve a prescribed warning notice on the prospective tenant explaining the rights being given up and the tenant must sign a declaration confirming it understands what it is agreeing to.
If the landlord was right, a tenant could lose its 1954 Act rights simply by agreeing to an option in a lease – with no warning notice, no declaration and no opportunity to take independent advice. Parliament clearly did not intend that result. The court observed that if a landlord wants a “baked-in” option to take priority over the 1954 Act, the straightforward way to achieve that is to comply with section 38A at the same time. In the absence of that procedure having been followed, the tenant keeps its statutory protection.
What this means for business tenants and landlords
The decision has immediate practical consequences on both sides of the landlord and tenant relationship:
- For tenants with options to renew: You have both a contractual right (the option) and a statutory right (the 1954 Act). They sit alongside each other. Having an option does not mean you have surrendered your 1954 Act protection. If you have not exercised the option, you can still serve a section 26 request or respond to a section 25 notice and pursue renewal through the statutory route (and the landlord must establish one of the grounds under section 30(1) to oppose).
- For tenants who have exercised their option: Once you exercise the option and a binding bilateral agreement comes into existence, section 28 engages and the 1954 Act falls away. At that point you have an enforceable agreement for a new lease and no longer need the statutory machinery. Make sure the terms you have agreed are acceptable before exercising.
- For landlords granting options: An option to renew will not by itself exclude the 1954 Act. If you want to grant an option but ensure the Act does not also apply, you need to follow the section 38A contracting-out procedure at the same time. A warning notice, a tenant’s declaration and compliance with the prescribed formalities are all required.
- For both parties on acquisition and renewal: Any business tenancy containing an option to renew where the section 38A procedure was not followed alongside it should be reviewed. The tenant retains statutory renewal rights in addition to its contractual option rights. That affects valuation, the landlord’s ability to recover possession and the negotiating dynamics on any renewal.
As a county court decision, Park Cakes does not bind other courts. However, the reasoning is firmly grounded in principle – in the nature of an option, the policy of the Act and Parliament’s clear intention that contracting out requires the section 38A procedure.
Get in touch
Working in conjunction with the firm’s commercial property solicitors, our property disputes team advises business tenants and commercial landlords on all aspects of 1954 Act renewals, including lease renewal strategy, section 25 and section 26 notices, opposed and unopposed renewals and the interaction between contractual options and statutory rights. If you have a commercial lease coming up for renewal and want to understand your position, we can help. Call us on 01753 889995 or email enquiries@bpcollins.co.uk.
The team’s ethos is simple: solve the problem.
