UK County Court confirms renewal option does not strip tenant of 1954 Act protection

The issue in Park Cakes Limited v Caterpillar Property Limited and Caterpillar Property Holdings Limited was whether a business tenancy containing a tenant's option to renew benefitted from the protection of Part II of the Landlord and Tenant Act (LTA) 1954.

The case confirms, at least at County Court level, that an unexercised option to renew is not an agreement within section 28 LTA 1954, and that a tenant in that position retains the full benefit of the statutory renewal machinery up to and including the point at which it exercises its option.

This decision addresses a question of considerable practical importance and one which is likely to be of significant interest across the commercial property market, subject to the impending appeal which is due to be heard on 8 May 2026.

Background to the dispute

The tenant (Park Cakes) held leases of two premises owned by the landlord (Caterpillar), with the contractual terms due to expire by effluxion of time on 13 June 2027. Each lease contained an option to renew, allowing the tenant to require the landlord to grant a further ten-year lease on substantially the same terms (save as to rent and the option itself), provided the tenant gave not less than 12 months' notice after the end of the seventeenth year of the term and had paid all rent due.

It was common ground that the tenant occupied the premises for the purposes of its business, meeting the qualifying ground for protection in section 23(1) LTA 1954. The issue was whether, notwithstanding that fact, Part II LTA 1954 was disapplied by reason of section 28.

Section 28: the central provision

Section 28 provides: "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." In other words, where the parties have agreed to the grant of a new tenancy on specified terms, the statutory renewal machinery falls away.

The landlord contended that the tenant's option to renew was an agreement for the grant of a future tenancy within the meaning of that section, and that because the option was contained in the lease itself, section 28 operated to disapply Part II LTA 1954 entirely, so that it never did, and never could, apply to the lease.

The competing arguments

The landlord's case was founded on a powerful policy argument. It argued that a tenant with the benefit of an option has a contractual right to renew which is at least as beneficial as the statutory right (if not more so), and that a tenant who has bargained for and acquired such a right is not within the class of persons LTA 1954 was designed to protect, namely tenants with no such rights.

The landlord submitted that a tenant-only option to renew achieves the same essential goal as LTA 1954, giving the tenant the right to require the landlord to grant a new tenancy (to which Part II would apply), but without the tenant being bound to take one. A tenant does not need to use the statutory renewal procedure if the parties have already agreed to the renewal of the lease.

The landlord also argued that the statutory language itself supported its case. It stressed the significance of the use of the word "agreement" rather than "contract" in section 28. An option, it said, is in substance an agreement between the parties for the grant of a new lease, the only difference being that the tenant can walk away by refusing to exercise the option. What matters for the purposes of the statute is that it is within the tenant's gift to require the landlord to grant a new tenancy.

The tenant, on the other hand, argued that neither section 28 nor any other provision of LTA 1954 disapplies the statutory machinery because of any contractual machinery for renewal. Parliament could have legislated for an exclusion, but did not do so.

The tenant also pointed to section 38A LTA 1954, which sets out the procedure for contracting out of the statutory protections. If the landlord were right about the effect of section 28, the option would have operated in substance to contract out of LTA 1954, yet without any of the safeguards that section 38A requires (namely, a landlord's warning notice and a tenant's declaration confirming its understanding of the rights being given up).

The decision

The judge ruled in favour of the tenant. His starting point was that an option imposes no immediate obligation on either party to do anything. The landlord is subject only to a contingent obligation to grant a tenancy in the terms provided for by the option, and that contingency is entirely at the election of the tenant. Only if the option is exercised strictly in accordance with its terms does it take effect as a binding agreement creating obligations on both sides.

When taking the option, the tenant agrees to the terms of the future tenancy but, unlike the landlord, does not commit to the grant of that tenancy. The tenant is expressly keeping its options open. The true agreement between the parties is an agreement for the right to require the grant of a new tenancy, exercisable by the tenant on agreed terms upon the fulfilment of specified conditions. That is not the same thing as an agreement for the grant of that future tenancy.

The judge held that the first moment when it can objectively be said that both the landlord and the tenant are agreed that there will be a grant of a future tenancy is when the option is exercised, and that accordingly the parties reach an agreement for the purposes of section 28 when the option is exercised, and not when the option is granted.

In reaching that conclusion, the judge found that an agreement for the purposes of section 28 must be enforceable by both parties, not merely by the tenant. An option, when granted but before it is exercised, gives the tenant a bundle of contractual rights against the landlord at a time when the tenant has no reciprocal obligations. The tenant only acquires an enforceable right to the grant of a new tenancy when the option is fully exercised.

At that point, the landlord comes under an obligation to grant the new tenancy, and the tenant simultaneously comes under a reciprocal obligation to take it. Before that point, neither party is bound.

The judge was also influenced by the section 38A point. He agreed that the obvious way to give a "baked-in" option absolute primacy, consistent with the terms and policy of LTA 1954, is to couple it with a valid agreement to contract out of the statutory protections under section 38A.

Arguments that were not advanced

Two potential arguments in favour of the landlord's position were not raised during the first hearing, but could be raised at the appeal. The first concerns the analogy with break options. It can be argued that it would be anomalous if LTA 1954 did not protect a tenant who chose to give up a contractual right of occupation early by exercising a break option, but did protect a tenant who simply declined to extend its term at the end. The Court of Appeal confirmed in Garston v Scottish Widows that a tenant loses its protection under LTA 1954 where it exercises an option to determine. As a matter of substance, there is arguably no principled distinction between a tenancy granted for a given number of years with a tenant's break option halfway through, and a tenancy granted for half that period with a tenant's option to extend for the same duration.

The second concerns section 36(2) LTA 1954 itself, which provides that even where a court has made an order for the grant of a new tenancy, the tenant may require that order to be revoked within 14 days. In other words, LTA 1954 itself contemplates a situation in which an "agreement" for the grant of a new tenancy (in the form of a court order) is enforceable against but not by the landlord.

If that is so, the judge's conclusion that mutual enforceability is an essential characteristic of an agreement for the purposes of section 28 may be open to challenge: Parliament appears, in section 36(2), to have been comfortable with the notion that a new tenancy can be compelled by the tenant at a point when the landlord has no equivalent power.

Additionally, section 69 of LTA 1954 expressly provides that the word "terms" in section 28 extends to "conditions", which suggests that Parliament was willing to accommodate conditional obligations (such as the landlord's obligation to grant being conditioned upon service of a valid option notice) within the statutory language.

Osborne Clarke comment

This decision will be welcomed by tenants who hold "baked-in" options to renew in their leases, and who feared that those options might have the unintended consequence of stripping them of the protections of the Act. 

For landlords, the decision creates a degree of uncertainty. Landlords who have granted options to renew in the expectation that those options would displace the 1954 Act should note that they may now face statutory renewal proceedings from tenants who, in parallel, hold contractual renewal rights. The judge's recommendation is that landlords who wish to give an option to renew absolute primacy should couple it with a valid agreement to contract out of LTA 1954 under section 38A.

We expect this decision to be appealed. The point is of significant commercial importance and has never been determined at appellate level. Given the force of the arguments on both sides, in particular those that were not considered at first instance, the higher courts may well take a different view.