When Colin the Caterpillar met the 1954 Act…

The Court of Appeal recently confirmed that a lease with an unexercised option to renew also benefitted from the security of tenure provisions in Part II of the Landlord and Tenant Act 1954. The tenant could therefore choose between a contractual renewal under the terms of the option or a statutory renewal.

Background

The tenant runs a cake making business, which includes making Colin the Caterpillar cakes. It has leases of two factories. The two leases were granted in 2007 for twenty years and are on identical terms. Each lease contains a tenant option to renew for a further 10 years provided certain conditions are satisfied (the tenant must give the landlord not less than 12 months’ notice of its intention to renew and have ‘paid the Yearly Rent up to the end of the Term prior to the end of the Term’).

The two leases were not contracted out of the security of tenure provisions of the 1954 Act.

If the tenant exercised the options to renew then the renewal terms provided that the rent under the new leases would be determined by way of reference to indexation. It was agreed between the parties that this would result in a higher rent than the market rent for the factories. The tenant therefore wished to request new leases under the 1954 Act and have the rent determined pursuant to the statutory renewal procedure, rather than exercise the options.

The issue

Section 28 of the 1954 Act disapplies the security of tenure provisions in Part II of the 1954 Act when an enforceable agreement for the grant of a future tenancy is in place. It provides (emphasis added):

Where the landlord and tenant agree for the grant to the tenant of a future tenancy of the holding, or of the holding with other land, on terms and from a date specified in the agreement, the current tenancy shall continue until that date but no longer, and shall not be a tenancy to which this Part of this Act applies.

The landlord argued that the existence of the options to renew meant that the tenant had an enforceable agreement to renew its leases and, because of section 28, the leases therefore did not benefit from the security of tenure provisions under the 1954 Act. If the tenant wanted to renew, it had to do so under the options.

The County Court found in favour of the tenant and the landlord appealed. The appeal was heard very quickly as the tenant needed clarity on whether it had 1954 Act renewal rights or whether it had to give notice by mid-June 2026 in order to exercise the options within the timeframe permitted.

The outcome

The Court of Appeal confirmed that the tenant had the right to renew under the 1954 Act. The unexercised options did not constitute an agreement for the grant of a future tenancy under section 28 of the 1954 Act. The tenant could therefore choose between a contractual renewal under the terms of the options or a statutory renewal.

Some points of note from the judgment:

• The Court found it would be wrong ‘to characterise all options to renew as amounting to an effective entitlement to the grant of a new lease’ and that in many cases the tenant’s position would be more ‘precarious’ under an option than if it exercised its statutory rights. Although the exercise of an option may be relatively straightforward (such as giving a written notice), it may also be subject to conditions which are more difficult to satisfy and/or are reliant on the actions of third parties. For example, it was noted that in this case the tenant could not claim a new lease if it had failed to pay the rent up to the end of the term. This was contrasted with the statutory ground of opposition which ‘requires persistent delay in payment of rent’. The court noted that, in other cases, if a condition were included such as requiring the performance of covenants, even a trivial breach of the repairing covenant could prevent the successful exercise of an option and deprive the tenant of its right to renew, whereas the statutory grounds of opposition to a renewal ‘generally require more substantial breaches’.
• When the option is exercised, everything changes. Section 28 of the 1954 Act requires a binding, mutually enforceable agreement between the parties. The Court found that although the option is an agreement at ‘the stage when the option is granted, the tenant has not entered into a binding commitment to take a new lease’. Until exercised it is not an agreement ‘for the grant to the tenant of a future tenancy’. The Court held that the tenant ‘only acquires an enforceable right to a new tenancy when the option is fully exercised’.

Comment

The case provides clear guidance that the existence of an unexercised option to renew in a lease will not deprive a tenant of its statutory rights under the 1954 Act.

Tenants should carefully consider their approach if they have the benefit of both an option to renew and the protections of Part II of the 1954 Act.

Caterpillar Property Ltd and another v Park Cakes Ltd [2026] EWCA Civ 575.