UK: Determining The Rent Under The 1954 Act - Getting It Right

Settling the rent for a Landlord and Tenant Act 1954 ("1954 Act") protected lease is almost always the most difficult part of any renewal. Section 34 of the 1954 Act provides a court with the power to determine the rent to be paid under a renewal lease in the absence of agreement between the parties. Two recent cases highlight the crucial importance of providing relevant comparable evidence to the court or risk suffering the financial consequences.

In the case of Britel Fund Trustees Limited v B & Q Plc (2016) (unreported) HHJ Mitchel was asked to determine the rent payable for the renewal of a retail warehouse lease. The renewal lease terms had mainly been agreed (save for rent) and included a mutual rolling break option. The rent being paid by the tenant, B&Q, at the end of the old lease was £776,139 per annum or £20 per sq ft. The landlord proposed an annual rent for the new lease of £696,500 per annum (equivalent to £18.90psf) and B&Q argued it should be £281,000 per annum (or £7.60 psf).

There was clearly a considerable difference in opinion between the parties which the court was tasked with deciding. When determining the correct level of rent the court had to focus in particular on: (a) whether any allowance for a 3 month rent free period should be made; and (b) the open market rent level for this warehouse lease with the inclusion of the break option.

Rent free period

In relation to the 3 month rent free period the court accepted that, in the hypothetical section 34 world, where the tenant is assumed to have vacated and removed its fixtures, the position would be that any new tenant would require a period of fitting out. Accordingly, a 3 month rent holiday was to be applied by way of 2.5% a discount to the rent over the entire 10 year term of the new lease.

Market rent

The second issue was how the market rent would be affected given that the break option, and 3 month fit out period, meant any willing tenant would have less than 2 and a half years' trading in the premises.

During the proceedings before HHJ Mitchell the parties negotiated on the basis that any hypothetical tenant willing to take a lease of these premises would be one of the main DIY retailers (i.e. similar to the current tenant B&Q). As a result, the parties had attempted to ascertain a market rent assuming a DIY retailer with a 10 year lease term and then applying a discount to take into account the presence of the break option. The tenant proposed the discount should be 50% and the landlord 10%.

However, it was eventually conceded during trial by the parties' experts that no DIY retailer would in fact be interested in a lease with such a break option. B&Q argued that the only potential tenant would be a discount retailer who would carry out a cheap and limited fit out. The court agreed with B&Q on this point but the problem for the court then became that neither parties' expert had provided comparable evidence in relation to discount retailers. The court therefore did what it could with the information available and found the annual rent payable by a discounter would be £466,940 per annum.

The court then had to consider what discount should be applied to this figure to take into account the presence of the break option in the renewal lease. It was decided that a discount of 20% would be applied and the market rent was eventually held to be £373,700 per annum. This was quite a reduction from the £698,000 originally sought from the landlord.

This takes us to the salutary lesson provided by the decision of Mr Justice Norris in the case of Flanders Community Centre Limited v Newham London Borough Council (2016) EWHC 1098 (Ch). This was another case dealing with section 34 of the 1954 Act.

Briefly by way of background, in 2001 the London Borough of Newham ("Newham") let a 40 year old purpose-built community centre to Flanders Road Community Association Limited ("Flanders") for use as a community centre. The lease was for a 7 year term at an annual rent of £1. The property was in poor condition and required £14,300 of repairs which Flanders was obliged to carry out within 1 year of the lease commencing or the rent was reserved to increase to £1,200 per annum. Importantly, the existing lease contained a number of unusual provisions relating to the premises use as a community centre and which provided a high degree of control for Newham.

The existing lease term expired in 2008 and negotiations for a new lease were unsuccessful. Flanders duly issued proceedings stating that the new rent reserved should be £1 per annum and Newham countered for a market rent at £23,000 per annum. Flanders' appointed expert considered the property had no market value (when adopting the comparable method) and so suggested an annual rent of £1 for the new lease. Newham's valuation expert suggested £16,000 per annum.

At first instance, Her Honour Judge Faber found that both experts had taken "irrelevant factors" into account in their evidence. For example, the judge pointed out that Flanders expert had factored in his client's inability to pay a higher rent and the poor condition of the premises (a tenant responsibility under the lease). Further, many of the comparable leases he referred to were at a nil rent or were leases that had yet to be granted and were still subject to negotiations. Newham's expert on the other hand had sought to rely on the rents paid for nearby community centres without considering the terms of their leases. He referred to 4 community centres but admitted in cross examination that he had no access to the relevant leases and did not take this into account in his comparison exercise. The restrictive provisions in the existing lease had not been discounted in his valuation.

HHJ Faber considered that as there was no evidence as to the current market rent she was unable to make a finding on that issue and thus the rent under the new lease should remain at £1.

Newham appealed and it duly came before Mr Justice Norris sitting in the Chancery Division of the High Court who eloquently noted that the trial "is not a dress rehearsal. The trial before Judge Faber was the first and last night of the show." Mr Justice Norris noted that the parties should not try to raise new arguments on appeal on questions of fact. Both parties had agreed that the passing rent of £1 was a relevant factor and accordingly HHJ Faber was entitled to place weight on it.

The Flanders case serves as a salutary reminder for parties to prepare cases properly with both counsel and experts being given detailed instructions and being aware of all circumstances. Where rent is concerned evidence needs to be given as to the nature of the property and how the original lease terms compare to others in the market. In simple terms, Norris J view was that Counsel and experts had been briefed by the parties and if they had not raised specific issues or brought them to the judge's attention at trial that was their failing.

In both these cases, the parties did not have relevant comparable evidence available at trial and the court had to make the best of the information available. The downside of the judgments happened to fall on the landlords but the lessons are there for tenants also; prepare fully for trial or face the potential consequences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.