Real estate focus: June 2025

Contracting out is here to stay: The Law Commission issues interim statement on 1954 Act reform

Introduction 

As mentioned in our November 2024 Real Estate Focus, on 11 November 2024 the Law Commission published the first of two consultations on its wide-ranging review of Part II of the Landlord and Tenant Act 1954 (the LTA) (the Consultation). The Law Commission has now issued an interim statement on its proposals in the Consultation for reform of the LTA. Whilst not final, the proposals suggest that any reform to the LTA is likely to be limited in scope.  

Security of tenure 

As it currently stands, the LTA gives most business tenants (depending on the type of tenancy) an automatic right to renew their tenancies following expiry of existing tenancies (known as "security of tenure"). The LTA contains an ability for the parties to "contract-out" of security of tenure by following a specified process prior to the tenancy being entered into. 

The first part of the Consultation considered whether business tenants should have security of tenure and if so, how this should operate. The Law Commission examined four models: 

• mandatory security of tenure;
• no security of tenure;
• the current contracting-out model; and
• a contracting-in model where the default position is that tenants do not have security of tenure but can choose to contract into a statutory scheme if they wish.

Provisional conclusions

The Law Commission's has set out its provisional conclusions in its interim statement which can be summarised as follows:  

• Having received the broadest support among consultees, the existing "contracting out" model is the right model. A significant number of consultees noted that the current model strikes the best balance between landlord and tenants. Also, notable numbers of respondents were concerned that change to the current model would cause unwarranted disruption to the commercial leasehold market.
• The list of tenancies excluded from the scope of the LTA (such as agricultural tenancies) is appropriate. Consultees generally favoured retaining the current law and the Law Commission agrees with this.
• The six-month threshold for excluding tenancies from the scope of the LTA will be increased and the Law Commission intends to consult on increasing the threshold to two years in its second consultation. While consultees gave mixed views on the duration of the tenancy that should benefit from security of tenure, there was generally support for increasing the threshold to provide greater flexibility in the short-term lettings market. 

What next? 

The Law Commission intends to publish a second consultation paper which will focus on the detailed and technical operation of the security of tenure regime, although its publication date is yet to be confirmed. Following this, the Law Commission's final recommendations will be set out in a report.

Tall Storeys – The FTT exceeded its powers in opining that a roof-top garden is a storey for the purposes of the Building Safety Act 2022

Issue

In October 2024, the First-Tier Tribunal (Property) (FTT) published a case decision which caused confusion as to what constitutes a ‘higher-risk building’ under the Building Safety Act 2022 (the BSA). The case involved a successful application by leaseholders of a mixed-use building for a remediation order relating to fire-safety matters at the building. The grant of the remediation order was not the issue but, rather, it was the scope of the order and the FTT’s comments in handing down its decision, which included an opinion that a roof top garden counted as a “storey” for the purposes of defining the parameters of a “higher risk building” (HRB) under the BSA. This provoked interest and concern from the building sector, as the FTT appeared to contradict the government’s published guidance for determining whether a building should be treated as ‘higher-risk’. This was particularly concerning as HRBs are subject to an enhanced regime requiring registration with the Building Safety Regulator (BSR) and an increased role for those ‘accountable’ for the building. The recipient of the remediation order submitted an appeal and the Upper Tribunal (Land Chamber) (UT) published its decision on 4 June 2025.

Background

The BSA, which was enacted following the Grenfell Tower fire in 2017, contains provisions intended to ensure the safety of people in, and standards of, buildings, particularly tall buildings. Broadly speaking, Section 120D of the Building Act 1984 and Section 65 of the BSA define HRBs as those buildings which (1) are at least 18 metres tall or at least seven storeys in height; and (2) are of a specified description, including that they contain at least two residential units. Section 65 of the BSA is subject to the Higher-Risk Buildings (Descriptions and Supplementary Provisions) Regulations 2023 (the Regulations) which contains information as to how to measure the height of a building and to count storeys.

The Regulations state: when determining the number of storeys a building has the following is to be ignored…(b) any storey which is a roof-top machinery or roof-top plant area or consists exclusively of roof-top machinery or roof-top plant rooms” but they make no specific reference to roof-top gardens or terraces. 

The case of Blomfield and Others v Monier Road Limited (Smoke House & Curing House) LON/00BG/HYI/2023/0024 concerned two wings of a single mixed use residential/commercial building, purpose built between 2016 and 2018. The roof of the building housed plant and machinery, as well as a roof garden. The case was brought to the FTT by the long leaseholders of the 29 residential units against the freeholder, Monier Road Limited (MRL), to compel MRL to undertake, without delay, replacement of certain high-risk cladding materials used in the construction of the building. 

The FTT’s decision, handed down in July 2024, included a lengthy discussion as to whether the building was an HRB, with the FFT considering the meaning of the word “storey” and casting doubt on the status and accuracy of the Government’s guidance documents. In reaching its decision, the FTT classed the building in question as higher-risk on the basis that, in calculating whether the minimum seven-storey threshold for HRBs had been attained, the top storey comprising of a roof garden and plant should be counted. The result was the issuing of a remediation order which contained ‘additional’ items appropriate for an HRB. 

Update

In May 2025, MRL appealed the remediation order on the basis that the scope of the order was too wide and included ‘additional’ items that were not before the FTT for consideration. The UT was asked to re-make the remediation order to remove, amongst other things, the requirement for MRL to submit the order to the BSR, as that order arose solely from the FTT’s opinion that the building in question was an HRB. 

On 28 May 2025, before the UT’s decision was handed down, the Ministry of Housing, Communities and Local Government (MHCLG) published updated guidance confirming the government’s earlier position that roof gardens are not storeys for the purposes of determining whether a building is a ‘higher-risk building’ under Section 120D of the Building Act 1984 and Section 65 of the BSA. The MHCLG confirmed that, in reaching this position, it considered the FTT’s decision from July 2024. It noted that, given the need to provide clarity within the legislation, it is consulting with the BSR and other relevant stakeholders regarding proposed amendments to the Regulations. 

The following week, the UT found in favour of MRL and set aside the FTT’s decision to require remediation of the ‘additional’ items. The UT confirmed that the BSA does not give the FTT jurisdiction to decide whether a building is an HRB and, indeed, the FTT had previously noted that its comments on this point were merely an “expression of opinion”. The UT concluded that the FTT's decision included no sound explanation for raising the ‘additional’ items and that it exceeded its discretion in doing so, resulting in a decision which was “procedurally irregular and unfair”. It further commented on the damage and uncertainty caused by the FTT’s lengthy consideration of the application of the definition of HRBs, and the Government’s guidance, both for the leaseholders of the building in question and for players in the building industry more widely.

Conclusion

The decision of the UT, which unlike the decision of the FTT is binding on future cases, suggests that the FTT’s comments regarding the definition of HRBs should not hold weight but the UT itself did not opine on whether roof-top gardens should be considered storeys. At present, the MHCLG advises sector and regulatory bodies to continue to refer to the latest Government guidance; this states that roof-gardens and other non-enclosed rooftops should not be included as a storey for the purposes of determining whether the threshold for HRBs has been met. However, whilst the MGCLG consults with relevant stakeholders and considers further legislative updates to the Regulations, there is still some uncertainty for those active in the building sector. Given the wide implications of falling within the HRB categorisation, stakeholders should carefully consider plans for buildings and seek advice on a case-by-case basis, particularly where they are planning to meet environmental targets through the inclusion of a roof-top garden or terrace.

Insurance commissions received by landlords are not part of insurance premium: the case of London Trocadero v Picturehouse Cinemas

Summary

In a significant decision for commercial landlords and tenants, the High Court in London Trocadero v Picturehouse Cinemas clarified the interpretation of “premium” in lease agreements, particularly in the context of recoverable insurance rent. The court held that landlords cannot recover insurance commissions received from brokers as part of the insurance rent, as these do not constitute genuine costs incurred.

Key Legal Issue

The central question before the court was whether the landlord was entitled to include commission payments it received from its insurance broker as part of the insurance premium recoverable from the tenant under the lease.

Main Facts

The dispute concerned a 35-year lease of premises at Trocadero Centre in London. Under the lease, the tenant was required to pay a proportion of the “premium payable” by the landlord for building insurance. The landlord arranged insurance through a broker and received substantial commission rebates (up to 57.2% of the gross premium). Despite this, the landlord sought to recover the full gross premium amount from the tenant as part of the insurance rent, including the rebated commission.

Key Findings

• “Premium Payable” requires actual expenditure: the court held that the term “premium payable” refers strictly to the actual sums paid by the landlord for insurance. Any amounts offset by commission rebates received from brokers do not qualify as recoverable costs. The court emphasised that only genuine expenses incurred to insure the property can be passed on to the tenant. Since the landlord’s commission was not a real cost, it could not be recovered as insurance rent.
• Distinction between broker’s and landlord’s commission: the court drew a clear distinction between the broker’s commission (a legitimate part of the insurance premium) and the landlord’s commission (a rebate or profit). The court found that the landlord’s commission served no purpose in maintaining insurance coverage and instead provided “the Landlord with an opportunity to profit at the Tenant's expense”.
• Contractual interpretation: the court applied a commercial and objective interpretation of the lease. It held that a reasonable landlord and tenant would expect the insurance premium to include broker’s commission, but not to be inflated by additional sums retained by the landlord. The lease did not expressly permit recovery of such commissions, and industry practice alone was insufficient to justify their inclusion.
• Implied terms and fairness: the court implied a term requiring the landlord to act in accordance with principles of arm’s-length negotiation. Drawing on previous case law, the court reasoned that insurance arrangements must “(i) be negotiated on arm's length terms, (ii) be negotiated in the ordinary course of business and (iii) be at a market rate”.  The court held that the lease required the landlord to recover only genuine insurance costs, not to derive a financial benefit at the tenant’s expense.
• Restitution for overpayment: importantly, the tenant was entitled to restitution for overpayments made in respect of the landlord’s commission. The court found that these sums were not contractually due and that the landlord’s retention of them amounted to “unjust enrichment”. While the tenant had paid the insurance rent it was contractually bound to pay, it also paid additional sums that were not contractually due. Consequently, “there was a total failure of basis, in relation to the payment of the amount corresponding to Landlord's Commission, even though the Tenant benefited from insurance cover during the years in dispute.” 

Practical implications

This case reinforces the principle that only genuine costs incurred by a landlord can be recovered from tenants under lease provisions relating to insurance rent. The decision also emphasises the importance of clear drafting and transparency in lease agreements, although whether a court will imply a term into leases to confirm recovery of only “genuine insurance costs” (notwithstanding apparently clear drafting in the lease) we will need to wait and see. Significantly, this case confirms that tenants may seek restitution where landlords have retained sums to which they were not contractually entitled.

The Limits of Section 84: Practical Benefits and the Control of Land Use in Great Jackson Street Estates Ltd v Manchester City Council

Introduction

In the recent case of Great Jackson Street Estates Ltd v Manchester City Council, the Court of Appeal considered a developer’s application to modify and discharge leasehold restrictive covenants under section 84 of the Law of Property Act 1925 (the 1925 Act). The covenants were preventing a proposed residential development in Manchester city centre, raising important questions about the court’s approach to balancing private property rights with broader development objectives pursued by local authorities when acting in a joint capacity as landlords.

Background and Facts

The appellant, Great Jackson Street Estates Ltd (Great Jackson), was the developer-tenant holding a long leasehold interest in land on Great Jackson Street, Manchester (the Site). The respondent, Manchester City Council (the Council), was the freehold owner of the Site and the relevant planning authority. The Site consisted of two redundant warehouses, which Great Jackson intended to redevelop into two 56-storey tower blocks comprising 1,037 flats, with an estimated cost of £300–350 million.

Planning permission for the redevelopment was granted, subject to a section 106 agreement. However, the lease contained numerous restrictive covenants that prohibited the redevelopment of the warehouses, along with other covenants requiring the Council’s consent. With only 60 years remaining on the lease term, the Council offered Great Jackson a new 250-year building lease in return for a premium on proposed terms that were unacceptable to Great Jackson.

As a result, Great Jackson applied to the Upper Tribunal (UT) under section 84 of the 1925 Act, seeking modification and release of the covenants to allow the development to proceed without the Council’s consent.

The UT dismissed the application, finding, among other reasons, that although the covenants did impede Great Jackson’s proposed use for the purposes of section 84(1)(aa) of the 1925 Act, they also conferred a “practical benefit of substantial advantage” on the Council under section 84(1A). Specifically, the restrictions enabled the Council to retain influence over the form of the redevelopment and reduce the risk of it not being completed in a timely manner.

Great Jackson appealed the decision to the Court of Appeal on two grounds: first, that the covenants conferred no practical benefit on the Council; and second, that the Tribunal erred in law in stating that, even if it had the discretion to modify the covenants, it would not have exercised that power.

Court of Appeal’s Decision – “practical benefit”

The appeal was dismissed and the Court of Appeal adopted a broad interpretive approach in defining “practical benefits” under section 84(1A) of the 1925 Act. It was held that a “practical benefit” must be practical and arise from compliance with the covenants, rather than the opportunity to extract financial gain from their release. The Court of Appeal rejected the submission that the Council was seeking a monetary advantage from the release of the covenants, noting instead that it was using them for their intended purpose (i.e., maintaining an element of control over the development of the Site). 

Lady Justice Asplin stated that the ability to prevent development of the Site was itself a benefit which flowed from compliance with the covenants in the lease. It was confirmed that the covenants supported the Council’s overarching development strategy for the area, prevented uncontrolled site development, and mitigated the risk that Great Jackson might fail to commence, progress, or complete the project in a timely manner. The restriction was therefore a useful tool in the overall management of the estate.

The judgment further stated that even if the Council’s role were to be considered solely as that of a landlord and not a public authority, it is legitimate to take account of its wider public duties, one of which is to ensure the orderly and proper development of the Site for the benefit of Manchester as a whole.

It was confirmed that the UT made an evaluative judgment in relation to all relevant elements in determining whether there was jurisdiction to discharge or modify the covenants under section 84(1)(aa). The question of whether the UT’s hypothetical exercise of discretion was correct did not arise.

Practical Implications

The Court of Appeal's decision highlights the court’s broad interpretation of “practical benefits” under section 84 of the 1925 Act and emphasises the court’s reluctance to modify or discharge restrictive covenants. Even where a covenant may frustrate a commercially significant development, it may not be modified or discharged if it confers a practical benefit such as enabling a landlord to exercise meaningful control over how the land is developed. The judgment also confirms that a local authority acting in its capacity as landlord may legitimately take account of its wider public duties when assessing the benefit of restrictive covenants. For developers, this case underscores the importance of factoring in not only legal but also strategic planning considerations when dealing with leasehold land subject to restrictive covenants.