The Impact of Options to Renew on Security of Tenure - Caterpillar Property Limited & Anor v Park Cakes Limited [2026] EWCA Civ 575

Legislative Background

Under Part II of the Landlord and Tenant Act 1954 (LTA 1954) qualifying business tenants benefit from security of tenure i.e. an automatic right to remain in a commercial premises and renew their tenancy at the end of a contractual lease term.

Section 28 of the LTA 1954 provides an important exception – where a landlord and tenant agree for the grant of a future lease of premises that are subject of an existing lease, the existing lease shall continue until the agreed commencement date of the future lease only and shall not benefit from security of tenure. In other words, if there is a binding agreement for a new lease, the tenant cannot also invoke its statutory renewal rights.

Facts of the Case

The tenant, Park Cakes Limited (of Colin the Caterpillar fame), held 20-year leases of two commercial properties. Both leases had the benefit of security of tenure. Each lease also contained a tenant-only option to renew which, if validly exercised, would provide for a further 10-year lease of each premises to be granted.

The annual rent payable under the renewal option would be index-linked. The implication of this was that the annual rent would be significantly higher than the current open market rent for both premises. The tenant therefore opted not to exercise the contractual option to renew. Instead they sought to utilize their security of tenure rights to renew their leases in accordance with the terms of the LTA 1954. This would provide for the annual rent payable to be based on the open market value of the premises – a considerably cheaper outcome.

The landlord, Caterpillar Property Limited, argued that the presence of the option to renew fettered the tenant’s security of tenure under the terms of section 28 of the LTA 1954.

The court were required to decide whether the unexercised tenant-only option to renew qualified as an agreement for the purposes of section 28 of the LTA 1954 and therefore meant that the tenant did not have the protection of security of tenure.

Decision

The Court of Appeal dismissed the landlord’s appeal and endorsed the initial judgement, finding as follows:

An option is not a mutual agreement – a tenant’s option to renew is a “unilateral” contract: it gives the tenant the right to call for a new lease but imposes no obligation to do so. Until the option is exercised, neither party is bound: the tenant has not committed to take a new lease, and the landlord’s obligation to grant one remains purely contingent.

Section 28 requires both parties to have “agreed” – The statutory language requires that the landlord and tenant “agree for the grant” of a future tenancy. At the point an option exists but has not been exercised, the tenant has not agreed to anything — it has merely acquired a right it is free to exercise. An “agreement” for section 28 purposes was a binding and enforceable contractual arrangement.

Conclusion

This decision has a number of significant practical consequences:

Tenants retain a choice – A tenant holding a lease with an unexercised renewal option is not confined to that option. It retains the right to invoke the LTA 1954 renewal procedure instead. In circumstances such as this one the option is commercially significant and a well advised tenant would seek advice on which path to pursue.

Landlords cannot rely on renewal options to exclude the application of security of tenure – a tenant’s renewal option in a lease will not, by itself, remove the tenant’s statutory security of tenure. An unexercised option does not act as a “back door” contracting-out. Landlords who wish to exclude a lease from security of tenure must use the formal contracting-out procedure prescribed by the LTA 1954.

Only a binding bilateral agreement engages section 28 – The decision reinforces that section 28 is engaged only where there is a truly mutual, enforceable agreement for a future tenancy — not a unilateral option that has not yet been exercised.