Business lease renewals – another court decision on rent, interim rent and fitting out periods
Since the pandemic, there have been a spate of cases going through the county courts concerning unopposed business lease renewals under the Landlord and Tenant Act 1954. Towards the end of last year, the County Court at Central London handed down judgment in Old Street Retail Trustee (Jersey) 1 Ltd and Another v. GB Healthcare Ltd (Unreported).
The issues for the Court to consider in this case concerned rent under the Act and rent-free periods, following on from the county court decision of HPUT Trustee No 1 v. Boots UK (2021). In Boots, it was held that that the yearly rent should not be reduced to reflect the fact that the new rent would be payable from the commencement of the lease with no fitting out rent-free period. This issue arose again in the Old Street case, but with a different outcome.
The premises in question were 199 Old Street, London, which were traded as a pharmacy. The terms of the new lease were agreed, save for rent and interim rent. The parties’ experts agreed that the interim rent should have been the same as the rent payable under the new lease and that the new lease would be for a term of 10 years with an upwards-only rent review after five years. The passing yearly rent was £40,250, which was determined at a review in March 2015. The parties were some way apart on rent. The claimant landlord sought a rent of £148,000 and the defendant tenant sought a rent of £45,000.
The Court determined a rent of £112,000 per annum (based on a Zone A rent of £192 per square foot with a rent reduction) having reviewed the expert evidence on comparables and applied a reduction of 25% in the rental value to reflect the economic effects of the pandemic and the worsening economy. The landlords had argued for a 15% reduction (conceding in closing submissions a 20% reduction) but the tenant sought a reduction of up to 47%.
The Court also adjusted the determined rent to take into account comparable evidence as to what the rents would have been had no rent free periods been in place. This Judgment, therefore, reflected a departure from the Boots decision, which had held that rent should not be reduced in this way (i.e. with rent payable from day one without a rent-free period). In Old Street, the Court concluded that the correct approach was indeed to analyse the comparables which broadly showed that similar lettings all benefited from a rent-free period and that this should be taken into account.
Commercial tenants will breathe a small sigh of relief following this decision, which rejects the principles reached in the Boots decision. Many will welcome that this Court was willing to adjust the new rent to take into account a rent-free period. However, it is important to note that this decision, like Boots, is also a county court decision and so not binding. Therefore, there will remain ongoing uncertainty between landlords and tenants as to how 1954 Act renewal rents should be valued, particularly in cases where there is a rent-free period, until an appellate court is asked to determine the matter. However, this case would suggest that adjustments are capable of being made where the evidence of comparables indicates that this is appropriate.