Louise Clark analyses a court’s ruling in a case involving an industrial lease renewal.
Key points
- It is for the party seeking a change from existing terms to justify them
- The court will seek to strike a balance between the parties’ interests
- Expert evidence that is not impartial will be disregarded
Sheffield County Court has refused amendments to a lease which would impose on the tenant obligations under energy efficiency regulations and also provided reminders as to the role of an expert valuer in Clipper Logistics plc v Scottish Equitable plc (Claim No G00SE930, 7 March 2022), a business lease renewal claim under the Landlord and Tenant Act 1954.
Background
The claim concerned a steel-framed distribution unit on an industrial estate in Rotherham let for a term of 10 years which expired on 30 June 2020. The defendant landlord was willing to grant a new tenancy and most of the terms of the new lease were agreed. The principal areas of disagreement were: the length of the term; the inclusion of alteration clauses concerning compliance with energy efficiency regulations; and the rent.
The law
Under sections 33-35 of the 1954 Act, where the parties cannot agree, it is for the court to determine the length of the term, the open-market rent and the other terms of the new tenancy. Changes to existing terms must be fair and reasonable, bearing in mind the terms of the current tenancy, the weak negotiating position of a sitting tenant and the fact that the general purpose of the Act is to protect the business interests of the tenant. It is for the party arguing for the change to justify it (O’May v City of London Real Property Ltd [1982] 261 EG).
The term
The tenant sought a five-year term to enable it to respond to changes in the market and protect its business interests, which relied heavily on 12-month supply contracts for tobacco and vape products. It argued that a five-year term reflected current market practice.
The landlord wanted a 10-year term with a tenant-only break at five years as such a lease would be valued with more certainty. The landlord’s role, as a fund which exists to generate a return to pension fund investors, also made a longer proposed duration desirable. The 12-month notice provision for a break would provide greater investor certainty than a shorter term where the claimant did not have to provide notice of its intention to stay or go.
The court preferred the landlord’s proposal. The tenant’s ability to carry on its business was as protected by the landlord’s proposal as by its own and a shorter term would deprive the landlord of the certainty it reasonably sought. By allowing the longer term with an option to break, the court was striking the correct balance between the parties’ interests.
Alterations
The landlord sought to prevent the tenant from carrying out alterations which would render the property “sub-standard” under the Energy Efficient (Private Rented Property) (England and Wales) Regulations 2015 and, should such works be carried out, for the tenant to be required to carry out the necessary works to bring the property back to a given EPC standard.
The current lease wording prohibited the tenant from making alterations to the structure and external appearance of the premises and required landlord’s consent – not to be unreasonably withheld – for any other alterations. So it would be difficult for the tenant to reduce the EPC rating so as to make the property sub-standard.
The court decided that the effect of the proposed clauses was to unfairly and unreasonably impose on the tenant a number of duties which were in law those of the landlord. It did permit a requirement that the tenant should return the premises to the landlord with the same EPC rating as it had at the date of the lease, on the ground of essential fairness.
Rent and expert evidence
Under section 34 of the 1954 Act, the court must determine the rent at which the holding might be expected to be let by a willing lessor to a willing lessee, on the terms of the tenancy and disregarding any effect of the tenant’s occupation, improvements and goodwill.
The tenant argued for an annual rent of £687,000 and the landlord for £852,000. The judge stressed the importance of expert evidence in enabling the court to decide the appropriate level of rent and of the duties to the court of an expert witness, including the need for impartiality.
Only the landlord’s expert approached his obligations properly. By contrast, the tenant’s expert had lost sight of the need for impartiality as illustrated by:
i. the repeated use in written evidence of inappropriate, often tendentious and inaccurate language to characterise the landlord’s expert evidence, akin to arguing a case rather than giving independent expert opinion;
ii. the lack of reasoning as to why his valuation was lower than the passing rent of £760,000 and the rent proposed by the tenant in the claim form of £775,000;
iii. his approach to the appropriate size of comparable properties, which, after lengthy cross-examination, he conceded was wrong;
iv. his inability or unwillingness to engage with basic propositions put to him in cross-examination;
v. his ignorance of works undertaken by the tenant to the property in 2017 and their exclusion from his valuation;
vi. his approach to valuation, which ignored the tenant’s repairing and redecorating obligations under the current lease; and
vii. his unjustified and illogical conclusion that the property – which was less than four miles from the M1 – was located in the M18 corridor, so excluding from his valuation a premium for access to the M1.
Where his opinions differed from those of the landlord’s expert, the court disregarded them. The rent was fixed at £852,000.
Louise Clark is a property law consultant and mediator