Lease renewals in the time of coronavirus

The impact of the Covid-19 pandemic on many business tenants has been stark and changes in the market are following. Tenants are likely to want greater flexibility going forward – possibly looking for landlords to share in the financial pain of any future pandemic and resulting lockdown, such as New Look’s move to turnover rents via its company voluntary arrangement. So in the context of a lease renewal under the Landlord and Tenant Act 1954, how far can parties seek to change the terms of their existing leases when it comes to length of term, break clauses and rent?

Length of term

If the duration of a renewal lease cannot be agreed between the parties, it will be determined by the court under section 33 of the 1954 Act. The court will decide the length of the term depending on “what is reasonable in the circumstances”, up to a maximum of 15 years.

Vodafone Ltd v Hanover Capital Ltd [2020] EW Misc 18 (CC); [2020] PLSCS 162, relating to a mast agreement, provides useful guidance on this. Vodafone sought a renewal lease of just three years, whereas the landlord sought a 10-year term. Vodafone wanted a short term because it had been holding over under the current tenancy since 2013 and uncertainties about the Electronic Communications Code meant that it wanted the right to seek another renewal lease – with potentially a lower rent – as quickly as possible.

The court found that, although the duration of the existing lease is a relevant consideration, there is no presumption towards repeating it. On the facts in Vodafone, the court found it fair to grant a 10-year term with a break midway. It was persuaded towards a longer term by the fact that the proceedings had involved significant costs for the landlord, the likely costs of additional renewals and the risk of further litigation if the lease was for a very short term.

Unhelpfully for landlords and tenants looking to understand the likely outcome from the court process, every argument over the duration of a new lease will very much depend on its own facts. One case which may weigh on landlords’ minds is Rumbelows Ltd v Tameside Metropolitan Borough Council [1994] 13 EG 102, where the landlord’s request for a minimum 10-year term was refused (against the backdrop of a previous 20-year lease) because of the tenant’s concerns about its long-term financial viability and its continuing liability in the event of an assignment. Although the court had the power to impose a longer tenancy than sought by the tenant, it accepted the tenant’s concerns as relevant and agreed to its proposed five-year term.

In general, relevant considerations for the court will include the duration of the old lease, the period of holding over and the nature of the tenant’s business. The court will balance the degree of protection to which the tenant is entitled in the interests of its business against the need to ensure that the decision is not unfair or oppressive to the landlord.

Break clauses

Tenants may now also be keen to include break rights in their new leases to give them flexibility. If so, then the well-known House of Lords decision in O’May v City of London Real Property Co Ltd [1977] 1 EGLR 76 will require tenants to justify such a term. Section 35 of the 1954 Act directs the court to have regard to the terms of the current lease and to all relevant circumstances.

In Vodafone, the court reflected the operator’s desire for flexibility by inserting a break clause at the fifth year exercisable on six months’ notice and with limited conditions. In another example, a tenant’s break clause was granted at the six-month point in a 14-year lease where the tenant was seeking a 12-month term (Ganton House Investments v Crossman Investments [1995] 1 EGLR 239).

In contrast, in Dukeminster Ltd v West End Investments (Cowell Group) Ltd [2018] PLSCS 164, the tenant wanted to include a break right because of potential disruption from the proposed redevelopment of the neighbouring American Embassy. The court was unpersuaded that the works would be so disruptive as to render the premises unusable and felt the tenant’s rights were already protected.

Rent

Many tenants may now look for a turnover rent in their new leases. Determining the new rent for a 1954 Act renewal lease under section 34 of the Act is a matter of valuation, not discretion. Accordingly, the term of the lease and any break rights will inevitably impact on the rent to be paid, as will the state of the market.

It remains uncertain whether the court has jurisdiction to order a turnover rent under the 1954 Act. The argument against such jurisdiction is that section 34(1) requires the new rent to disregard the effect of the tenant’s occupation of the holding and the goodwill of the tenant’s business. On the other hand, the wording of section 34(1) requires the court to determine the rent for which the property “might reasonably be expected to be let in the open market”. So if there is evidence that rents in the open market for similar properties are assessed by reference to turnover, a turnover rent could be regarded as the “market rent”. This was the expert evidence given for car park rents in National Car Parks Ltd v Hawksworth Securities plc (unreported, Cambridge County Court, 12 May 2016) where a base annual rent was awarded plus 60% of turnover above certain levels.

Interim rent

Although section 24C provides that interim rent in a lease renewal will usually be the same as the rent under the new lease, exceptions can be made in limited circumstances and some of these may now arise. Exceptions include section 24C(3)(a), where the landlord or tenant satisfies the court that the new lease rent differs substantially from the rent that would have been determined under the 1954 Act if the assessment had been undertaken on the earliest termination date for the tenancy which could have been applied by the section 25 or 26 notice. In such circumstances, the earlier valuation date will be used for the interim rent rather than the new lease rent.

The court can also order a different interim rent where the terms of the new tenancy differ sufficiently from those of the previous tenancy, under section 24C(3)(b). In that scenario, the landlord or tenant must show that the new lease rent is substantially different from the rent which the court would have determined to be payable under the 1954 Act for a new tenancy with other terms the same as the previous lease. If this is demonstrated, then the interim rent will be whatever rent it is reasonable for the tenant to pay. In determining what is reasonable, the court is to have regard to the rent under the previous tenancy and to assume a notional tenancy from year to year. This approach also applies where the circumstances fall within both sections 24C(3)(a) and (b).

These provisions have historically been seen as offering tenants a cushion against the shock of a substantially increased rent, but perhaps not as a protection for landlords in a falling market. In Humber Oil Terminals Trustee Ltd v Associated British Ports [2012] EWHC 1336 (Ch); [2012] PLSCS 112 the judge commented that he did not think the interim rent rules were designed to provide a cushion for tenants only. Instead, the court found that it was to determine the reasonable rate of payment between the parties “in respect of the particular benefit conferred in the particular context in which it is conferred”.

Overall, it is possible that some level of a “cushioning” interim rent might be sought by landlords in a falling market. However, this will only be available where there have been substantial changes in the market since the service of notice under the 1954 Act or where the terms of the renewal lease are sufficiently different to those of the previous lease.

A question of reasonableness

There is a balance to be struck between landlords and tenants with regard to all of these issues. No doubt, what happens in the market over the next couple of years is likely to yield some interesting court decisions on what is now considered reasonable in all of the “new normal” circumstances for renewal leases under the 1954 Act.

This article was first published in Estates Gazette on 9 November 2020 and was written by Emma Humphreys and Georgina Muskett at Charles Russell Speechlys LLP. For more information, please contact Emma on +44 (0)20 7203 5326 or at emma.humphreys@crsblaw.com or Georgina on +44 (0)20 7203 8897 or at georgina.muskett@crsblaw.com.