Landlord and tenant – Business tenancy – Renewal of lease – Claimant making unopposed application for new tenancy of retail premises – Parties failing to agree certain terms of new tenancy – Court asked to determine outstanding terms and rent payable – Lease terms determined accordingly
The claimant tenant operated a large branch of its retail operations in the Westfield London shopping centre, Shepherd’s Bush. The defendant landlord had a long leasehold interest in the premises. The current lease was for a term of 10 years commencing on 1 October 2008, and continued under the Landlord and Tenant Act 1954.
The claimant served a notice under section 26 of the 1954 Act requesting a new tenancy. The application was unopposed. Most of the terms of the new lease were agreed but some remained in issue, including the rent payable, the list of services included in the service charge, the trigger for a pandemic rent suspension clause and the interim rent payable until the new tenancy was granted. The court had to determine the terms of the new tenancy under section 35 of the 1954 Act before moving on to determine the rent payable because those terms were likely to have an impact on the market rent to be ascertained under section 34.
The defendant proposed changes to the service charge provisions to enable it to recover the costs of energy audits and steps taken to improve energy efficiency and of obtaining energy performance certificates when letting or renewing the lease of any unit.
The defendant also proposed that the trigger for the new rent suspension clause should be compulsory cessation of trading. However, the claimant operated a post office, and it was required to keep the shop open to provide essential postal and banking services through the coronavirus pandemic. Therefore, it suggested that the rent suspension clause should operate when non-essential retailers were unable to open.
Held: The lease terms were determined accordingly.
(1) The court had to begin by considering: the terms of the current tenancy; that the burden of persuading the court to change the terms was on the party proposing the change; that the change had to be fair and reasonable in all the circumstances, including the comparatively weak negotiating position of a sitting tenant requiring renewal; and the general purpose of the Act to protect the business interests of the tenant in so far as they were affected by the approaching termination of the current lease: O’May v City of London Real Property Ltd [1982] 1 EGLR 76 applied.
(2) Although the claimant was one of those businesses not required to close due to the coronavirus restrictions, the advantages of remaining open when non-essential shops were closed, in a largely empty Westfield shopping centre, were more notional than real. The claimant could gain no competitive advantage in circumstances of such restricted trading.
Therefore, the rent suspension clause should be activated in accordance with the claimant’s proposal, namely the closure of non-essential retailers, and the consequences of that activation should accord with the defendant’s original proposal, namely an obligation to pay 50% of the principal rent and the whole service charge, subject to an obligation to account for any government assistance.
(3) There had to be a good reason for the court to impose a new term not in the current lease against the will of either party, and the burden of persuading the court to change the terms was on the party proposing the change. In the present case, the proposed changes to the service charge were opaque in their intent and scope, and were likely to lead to litigation. It was not enough for a landlord, proposing to impose a new term on a tenant, to compensate for the vagueness of the wording and the uncertainty of what was intended by saying that everything would be conducted in accordance with the principles of good estate management. There was nothing to persuade the court that the proposed change would be fair and reasonable in all the circumstances: O’May applied.
(4) By section 34(1) of the 1954 Act, the rent payable under a tenancy granted by order of the court might be that at which the holding might reasonably be expected to be let in the open market by a willing lessor, disregarding any effect on rent of the fact that the tenant or his predecessors in title had been in occupation of the holding, any goodwill attached to the holding by reason of the tenant’s business and the effect on rent of any improvements. Determination of the rent under section 34 involved a process of valuation, supposedly by reference to the date of the new tenancy. However, given that the new tenancy would not begin until (at best) three months and 21 days after judgment (section 64), the court had to do its best with the evidence available at the date of the hearing, including evidence of likely changes in the market between the date of the hearing and the start of the new tenancy.
The terms of section 34, by contrast with section 35, required the court to consider the appropriate rental for an empty unit and a hypothetical incoming tenant. The court had to assume a willing lessor and a willing lessee. There was no reason why, in the absence of other material evidence, the rent should not be assessed by reference to general demand derived from occupation of other properties with similar characteristics. The court had to assume a willing tenant sufficiently interested to enter into negotiations to agree a rent, and assess the rent by reference to evidence of general demand derived from other comparable properties, with such adjustment as might be necessary: Hewitt v Telereal Trillium [2019] EGLR 28 followed.
(5) The passing rent under the claimant’s existing lease was £953,000 pa, based on a Zone A rate of £327.50 per sq ft, set by an arbitrator on rent review in 2013. There was a gulf between the valuations of the two experts. Therefore, the court would rely on the strongest comparable evidence of the appropriate rent for the premises, ie a letting in April 2020, at £255.29 per sq ft Zone A, agreed towards the bottom of the market and devalued for three months’ rent-free fit-out, to which discounts of 10%, 24% and 20% respectively would be applied to allow for the size and location of the premises and the effect of the pandemic. That resulted in a rent of £139.54 per sq ft Zone A, or £404,666 pa.
(6) The interim rent was that payable from the “appropriate date” (agreed to be 1 October 2018) until the new tenancy was granted. By section 24C(2) of the 1954 Act, the interim rent was normally the same as the new rent. But by section 24C(3)(a) that did not apply if the interim rent “differs substantially” from the new rent. It was common ground that the retail market was much firmer in October 2018 and that, had the rent been agreed at that time, it would have differed substantially from the new rent. So, by section 24C(5), the interim rent was the “relevant rent”, namely the rent which the court would have determined under section 34 to be payable under the new tenancy if it had commenced on 1 October 2018. The court would set the interim rent at £261.65 per sq ft Zone A, or £758,785 pa.
Greville Healey (instructed by TLT LLP) appeared for the claimant; Mark Wonnacott QC (instructed by DAC Beachcroft LLP) appeared for the defendant.
Eileen O’Grady, barrister
