If a lease contains a contractual renewal option, does this mean that it falls outside the security of tenure regime in the Landlord and Tenant Act 1954 ("the 1954 Act")? This is the question that the Court of Appeal considered in Caterpillar Property Limited & Anor v Park Cakes Limited [2026] EWCA Civ 575.
Business tenants can benefit from both a contractual renewal option and a statutory right to renew
Overview
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Background
The tenant, Park Cakes Limited, held two leases of cake factories on similar terms. Both expired in June 2026 and contained options to renew. The annual rent that would be payable under any new leases granted pursuant to the options would be index-linked which, it turned out, would result in higher rents than the open market rent that would be payable under renewal leases granted pursuant to the 1954 Act. The tenant therefore decided to exercise its right to receive statutory renewal leases.
The landlord argued that the tenant could only obtain renewal leases by exercising the contractual options. This argument was based on the idea that each contractual renewal option contained in the leases constituted an agreement "for the grant to the tenant of a future tenancy of the holding" within the meaning of s.28 LTA 1954. This, they said, had resulted in the leases falling outside the protection of the LTA 1954 thus preventing the tenant calling for a statutory renewal. Furthermore, it argued that the tenant had no need for statutory protection because it had successfully negotiated a contractual renewal right.
This was a novel argument, so there was very little caselaw for guidance. The tenant reasoned that no such agreement for a future tenancy would exist until the option had been properly exercised, and it applied to court for a declaration that the leases did in fact benefit from security of tenure.
What does section 28 LTA 1954 say?
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 judgment
The tenant's argument prevailed in the County Court. It obtained declarations that the leases enjoyed protection under the 1954 Act, which meant that it could choose between exercising its contractual options or seeking to renew the leases under the 1954 Act. The landlord appealed against this decision and, because of the looming deadline for exercising the option, the tenant successfully applied for the case to be transferred straight to the Court of Appeal.
The Court of Appeal unanimously decided in favour of the tenant. It held that an option is not an obligation on the grantee, merely an offer by the grantor. It also stressed the public policy dimension that an option to renew should not be a back-door route to excluding a lease from the security of tenure provisions in the 1954 Act.
What was the Court's reasoning?
- Construction of an option agreement: section 28 refers to the parties agreeing to a future tenancy. Under a contractual option to renew, the tenant has not agreed to take another lease and, whereas the landlord has agreed to grant another lease to the current tenant, this is often subject to several conditions being met. An option is best characterised as an irrevocable offer by the landlord, rather than a conditional contract, and an agreement for the grant of a new lease would only reached once the option has been successfully exercised.
- Comparison of a tenant's statutory and contractual renewal rights: The Court rejected the landlord's argument that an option to renew is an effective substitute for the statutory right to a new lease, pointing out that an option to renew is likely to be more precarious than 1954 Act rights. For example, an option to renew could be conditional on full compliance with a tenant's repair covenant, a breach of which is much easier for a landlord to establish than its statutory right to refuse a new lease by demonstrating substantial breaches by the tenant under s.30(1)(c ) LTA 1954.
- The statutory security of tenure regime: The Court emphasised that if the parties wanted to exclude the leases from the statutory security of tenure regime in the 1954 Act then they should have followed the contracting-out process in section 38A.
Conclusion
This decision is good news for tenants, who can now be certain that they are fully entitled to benefit from both a contractual option to renew and a statutory right to call for a renewal lease.
Landlords are reminded that the only way to ensure that their tenants do not have security of tenure is to follow the contracting-out process. The Law Commission is currently exploring ways to make this process somewhat easier.
For both parties, this case is a good reminder of the workings of section 28: if a new agreement for lease (containing lease terms and a start date) has been entered into prior to the expiry of a current lease, the current lease will not have security of tenure whether or not it has been contracted-out.
