What is the impact of an option to renew on security of tenure?

Avid followers of cases relating to Part II of the Landlord and Tenant Act 1954 will be interested in an upcoming judgment from the Court of Appeal.  The question being considered (surprisingly, for the first time) is whether, if a “protected” tenancy (i.e. one with security of tenure) contains a tenant’s contractual option to renew, the tenancy can still be considered to have the protection of the 1954 Act.   Such options are not uncommon, even in leases with security of tenure.    At first instance, the judge in Park Cakes Limited (“Park Cakes”) v Caterpillar Property Limited & Anor2026 (“Caterpillar”) held that the option did not remove 1954 Act protection. 

The tenant, Park Cakes, holds two leases with security of tenure, both of which contractually expire on 13 June 2027. They also contain tenant-only options to renew, exercisable on giving 12 months’ notice after the end of the seventeenth year of the term.  If the parties had intended the leases to be contracted out of the 1954 Act, they could have followed the usual ‘contracting out’ process but they did not. 

The landlord, Caterpillar, sought to rely on section 28 of the 1954 Act which provides that where the parties “agree for the grant to the tenant of a future tenancy…on terms and from a date specified in the agreement.” the 1954 Act will not apply to the existing tenancy. By way of example, this would clearly apply in the situation where the parties enter into an agreement for the grant of a new lease.  

The landlord argued that:

• the option was an agreement for the purposes of section 28 for the grant of a new tenancy, noting that section 28 only refers to there being an agreement between the parties, as opposed to a contract; and
• the Act was designed to protect tenants who did not have renewal rights; a tenant with an option does have renewal rights, subject to exercising it and complying with its terms.  

The judge disagreed. An option is different from an agreement for lease, because when granted, it does not impose any immediate obligation on either party.  In taking the option, the tenant agrees the terms of the future tenancy (in this case two new 10-year terms) should it be granted but the tenant does not have to exercise the option.  To come within section 28, both parties must be bound, and this happens only once the option is properly exercised.  The judge also noted that parliament could have legislated expressly for the 1954 Act to be disapplied where leases contained options to renew but did not do so.  

This is a County Court decision and, as such, is not binding, but it is reassuring for tenants.  How long this will last will depend on the outcome of the appeal, which was heard earlier this month.  In the meantime, if landlords want certainty around security of tenure, they should continue to follow the formal contracting out procedure. 

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