Redevelopment Clauses at their Prime? Developer’s narrow interpretation of a redevelopment clause demolished in court

Most leases of multi-occupied buildings will contain an ability for the landlord to carry out works to other parts of the building. But that ability will normally be tempered so that the tenant’s use of their property is not undermined.

Inevitably the issues dealt with by these clauses will be generic in nature — at the time the lease is granted the landlord does not know exactly what works it would like to do at a later date. So it will seek wide powers to do all kinds of works and minimise its liability to the tenant. But equally the tenant must try to protect itself against damage to its trade or use of the property arising from these unknown works. So tenants will often use words like ‘without materially adversely affecting the tenant’s trade’. A recent case highlights how these types of clauses can mean different things to different people, and the dangers of getting it wrong.

The case of Prime London Residential Development v Withers LLP [2021] EWHC 2401 (Comm) concerned the Ferrari dealership on Old Brompton Road in South Kensington. The tenant car dealer occupied the ground floor under a lease granted in 2011. When the lease was granted, the landlord knew that the upper parts of the building were ripe for development but did not have specific plans. So the lease reserved wide rights for the landlord to carry out works, but subject to the caveat that the tenant’s use of the property must not be ‘materially adversely affect[ed]’. I will call this the ‘Redevelopment Clause’.

The lease also contained a wide exclusion of liability clause relating to the landlord’s redevelopment works, essentially providing that the landlord would only be liable for physical damage to the property and thereby excluding business losses. But again, this was qualified, so that in carrying out redevelopment the landlord must ‘use reasonable endeavours to cause the minimum disturbance to the tenant’. I will call this the ‘Exclusion of Liability’.

In 2014 the landlord sold the freehold to a developer who planned to demolish the upper floors whilst the Ferrari dealer remained in situ, and then develop high end flats in their place. They took advice from their solicitors on the meaning of the Redevelopment Clause and the Exclusion of Liability. Their solicitors Withers LLP advised that whilst the lease contemplated that the landlord could redevelop, if the car dealer’s business was adversely affected they could seek an injunction to halt the work.

The developer held some discussions with the tenant about their plans. They hoped to convince the tenant that the redevelopment would not result in material harm, and that the developed building would provide more suitable surroundings for the tenant’s trade. But the tenant was not convinced and threatened to seek an injunction. The developer sought to distil the meaning of the lease down to a yes–no question: could they demolish and rebuild the upper parts without breaching the lease? Under pressure from the developer, it appeared that their solicitors answered this with a ‘yes’. The court held — although this was disputed by Withers — that Withers had revised their earlier advice and advised at a meeting that the demolition and rebuilding would be lawful. That advice proved to be wrong; the Ferrari dealer obtained an injunction stopping the works. The developer then had to agree a revised schedule of works with extensive controls in place to prevent noise and vibration during the car showroom’s main trading hours.

The meaning of the Redevelopment Clause and Exclusion of Liability were open to interpretation, but the court took the tenant’s side in this case. The judge was clearly swayed by the high-end nature of the tenant’s business and the need to safeguard this. The lesson for tenants to take away from this is the importance of standing their ground in negotiating these types of clauses. The lesson for landlords is to tread with caution when carrying out noisy or intrusive works, and to take heed of the individual tenant’s requirements.

It is vital for both landlords and tenants to be well-advised when dealing with these drafting issues. At gunnercooke we have a team of property lawyers who are highly experienced in this area. Please get in touch with Matthew Cox if you would like to discuss any of the points raised.