The Court of Appeal has unanimously confirmed in Caterpillar Property Limited & Anor v Park Cakes Limited [2026] EWCA Civ 575 that an unexercised tenant's contractual option to renew a business lease does not remove the tenancy from the protection of Part II of the Landlord and Tenant Act 1954 ("the 1954 Act").

For retail and supply chain businesses – which occupy manufacturing facilities, distribution centres, warehouses and logistics hubs on longer rack rent leases containing 'baked-in' renewal options – this is one of the most commercially significant leasehold decisions of recent years.

The judgment (which upholds the earlier County Court ruling) confirms that there can be a strategic choice for the Tenant towards the end of the contractual term between exercising a contractual renewal option, or alternatively pursuing a statutory renewal – and both options remain open to a Tenant. 

Background: The case

The Tenant, Park Cakes Limited (producers of Colin the Caterpillar Cake) occupied two commercial premises owned by the Landlord, Caterpillar Property Limited and Caterpillar Property Holdings Limited. The 20-year leases were due to expire in June 2027, and each contained a tenant-only option to renew for a further 10-year term, exercisable after the end of the 17th year of the term on not less than 12 months’ notice to the Landlord.

The landlord argued that: 

• the Tenant's sole right of renewal lay through exercise of the options - which, among other things - would have resulted in a new tenancy at a rent determined by a fixed formula which was likely to be substantially higher than the market rent that would be fixed upon an application to the court under section 34 of the 1954 Act; and 
• the option was an "agreement for the grant of a future tenancy" within the meaning of section 28 of the 1954 Act - meaning the 1954 Act would have been entirely disapplied, and the Tenant would not have security of tenure or a statutory right to renew. 

The Tenant, faced with a formula rent increase which would be higher than a market rent which would be achieved on statutory renewal, sought to renew under the 1954 Act instead. 

There was no previous authority on this point.

The law: Section 28 and what it means

Part II of the 1954 Act provides automatic security of tenure to qualifying business tenants and "contracting out" of the Act is expressly permitted only through the statutory procedure.

Section 28 provides a very narrow exception, disapplying Part II where the parties have already agreed in writing to the grant of a future tenancy on specified terms and from a specified date and provides that:

If section 28 had applied, Park Cakes Limited would have had no statutory right to renew, and the Landlord would not have needed to rely on any of the section 30(1) grounds to oppose renewal. The Tenant would also have been at risk of losing possession at lease expiry if the option to renew was not validly exercised.

The practical stakes could not have been higher: a business forced to exercise an option at above-market rent, or lose its premises entirely as it has no security of tenure.

The Court’s reasoning

The Court of Appeal's analysis rested on three interconnected propositions:

1. An option is not a bilateral agreement for a future tenancy

The grant of an option imposes no obligation on the grantee and only contingent obligation on the grantor which arises at successful exercise. A Tenant is by virtue of an option to renew, keeping their options open – it may never be exercised – the Tenant has not entered into a binding commitment at the point of the grant of the option to the grant of a future tenancy.

2. An option can be more precarious than the 1954 Act

Options to renew are usually conditional and can be a trap for the unwary with very strict conditions. Often options can fail to be validly exercised by tenants so that even trivial breaches may preclude successful exercise. The Court stated that "from the tenant's perspective the option is best regarded as analogous to an irrevocable offer rather than a conditional contract". 

3. Contracting out requires the section 38A procedure – no shortcut

If the Landlord’s argument had succeeded in the effect of section 28 of the 1954 Act, the option would have operated in substance to contract out of the Act; the Tenant having given up statutory rights, without a warning notice being served or a statutory declaration being sworn in accordance with section 38A of the 1954 Act acknowledging that those rights were being given up.

This would be at cross purpose to the intention of the 1954 Act and provide parties with the means of contracting out without following the section 38A procedures. Unsurprisingly, the Court was opposed to setting this precedent and confirmed that if a Landlord wanted to give a contractual option to renew absolute primacy, they would need to follow the section 38A procedure and contract out the lease containing the option before completion.

Court’s judgment

The Court held that the option to renew was not an agreement for the grant of a future tenancy within section 28 of the 1954 Act. Therefore, an occupying business tenant can have the benefit of the option to renew and its statutory rights, and it’s the tenant’s strategic choice as to which path to follow. 

As the Court of Appeal reached a unanimous decision to a provision of the 1954 Act which had not previously received much judicial consideration, the point is considered by many as settled. Therefore landlords and tenants should plan their portfolio strategies accordingly. 

Takeaways

For tenants with existing leases containing renewal options:

• Do not miss option notice deadlines. Options are typically exercisable in a specific window on a set notice period. Missing the notice window means losing the option irrevocably, leaving only the statutory route – which itself requires timely action.
• Take strategic advice before exercising an option to renew. Once exercised, an option creates a binding bilateral agreement so section 28 would apply. That is the point of no return, statutory renewal rights under the Act are then disapplied and a Tenant cannot revoke this or change its mind and follow the statutory procedure instead – the Tenant is boxed in.
• Model the economics. When considering its strategy a tenant should compare the rent and terms achievable under the option against what a Court might award under sections 34 and 35 of the 1954 Act. The Park Cakes Limited v Caterpillar Property Limited & another decision means a Tenant does not have to choose one route prematurely – but a tenant should understand the financial implications of each path in good time before the deadline arrives.

For tenants entering new leases with renewal options:

• Ensure your statutory rights are preserved as landlords may seek to 'contract out' leases which contain options to renew going forwards. If so, tenants should understand what they are giving up in return for this option to renew – especially as strategically having both is the best option for a tenant. 

For landlords and investors:

• If the intention is for the tenant to only have the contractual option to renew, not statutory rights, the formal contracting-out procedure under section 38A of the 1954 Act should be followed. 
• Where existing options to renew contain above-market rents or other terms which may no longer be modern market practice, be prepared for the 1954 Act renewal process instead as Tenants may seek an application to the Court under section 34 of the 1954 Act to fix the rent and otherwise adjust the terms to reflect modern market practice.