The grand-daughter maybe under-occupying (we don't know this from posting) BUT the law is the law - see my original posting quoting the Housing Act 1985 and the tenant's legally enforceable statutory rights!
Readers might also like to examine any of the recentish Court of Appeal decisions where a family member is left in occupation as a successor following death of tenant to get a feel for the way the higher courts have intrepreted 'reasonableness' and 'suitable alternative accommodation.Bracknell Forest BC-v-Green in March 2009 for example
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Of course if grand-daughter is prepared on a purely voluntary basis to ove to a one-bedroom alternative home then no problem.
Suggest readers might also like to read George Monbiot is Guardian 4 January 2011 regarding under-occupation and why is it only an issue in social housing!