Lease – Renewal – Rent assessment – Claimant tenants making unopposed application for renewal of lease of public house – Issue arising as to method of calculating new rent – Whether claimants entitled to rent reduction in unusual economic circumstances – Ruling in favour of defendant landlord
The claimants were tenants, under Part II of the Landlord and Tenant Act 1954, of a public house owned by the defendant landlord. Situated on the edge of a village, the property comprised a two-storey building with a basement and a forecourt, car park for around 50 vehicles, a beer garden and seating for approximately 60 customers. The tenants’ private accommodation was on the first floor; it included a living/dining room and three bedrooms. The lease included a partial tie for beers to be purchased from the defendant’s nominated supplier.
The claimants made an unopposed application under Part II of the 1954 Act to renew their lease following the expiry of the previous five-year lease by effluxion of time. All the terms of the new lease were agreed apart from the amount of rent. The passing rent set in 2001 was £16,000 pa. A question arose as to the correct method of calculating the new rent.
The defendant’s expert argued that a number of different comparables provided a useful cross check on the assumptions made as to sales. Those could include comparing rent with turnover and data from comparable public houses. However, because the existing tenant’s accounts would not be available to the hypothetical tenant, the accounts produced in the action were of limited relevance. They could not be used to support a detailed position that might be adopted by an incoming tenant.
The claimants’ expert rejected the use of comparables but submitted that several adjustments had to be made in order to calculate the rent, namely: (i) an adjustment in order to satisfy the prime principle that the tied tenants should not be financially worse off than if they were free of tie; and (ii) the application of a “value equation”, which would calculate the tied rent as the product of the orthodox free-of-tie rent, less 100% of the extra profit that the landlord made by letting the subject property tied.
Held: The court ruled in favour of the defendant.
The 1954 Act required the court to ask how much rent an incoming tenant would be willing to pay were the public house available to be let in the open market on the same terms as those contained in the new lease. The Act required reasonableness and an objective assessment of the market rent that would be offered by a hypothetical tenant for the agreed lease of the public house in the current market.
The method adopted by the claimants’ expert was not representative of the approach generally adopted in the market. The primary method used in preparing a rental valuation for licensed properties was the analysis of comparable transactions by reference to trading potential and the adoption of the profits-test method of valuation. Estimated rental values of each particular premises arose only from market evidence and analysis relating to the maintainable income stream derived from the operation of the business in the hands of a reasonably efficient operator. The court was not prepared to prefer the approach of the claimants over the existing usual practice among professional valuers: RICS Valuation Information Paper No 2, The Capital and Rental Valuation of Restaurants, Bars, Public Houses and Nightclubs in England, Wales and Scotland, referred to.
A hypothetical tenant would carefully consider a number of facts and matters, namely: (i) the effect of the unprecedented economic crisis; (ii) the present restrictions on the availability of ready, inexpensive capital; (iii) the market-depressing effect of the steady news of public house closures; (iv) the smoking ban; (v) the fact that free houses were available on the market and the tenant could expect, other things being equal, to make a much greater profit from being able to buy beer on the open market and not at nominated suppliers’ prices; and (vi) the fact that free accommodation was provided at the public house.
Those six factors were not susceptible to calculation and quantification, but they would have a significant adverse effect on the confidence of a prospective tenant and would encourage caution in any bid. It was also important not to allow double-counting to creep into the assessment. Had the hypothetical tenant used those factors to depress the barrelage estimates, it would be wrong to apply the same factors all over again when assessing the figure for the bid.
In the instant case, taking all those matters into consideration, the hypothetical tenant would bid a rent of £18,000 for the lease of the public house, which figure would be inserted into the new lease.
Anthony Verduyn (instructed by Ferdinand Kelly, of Tamworth) appeared for the claimants; Mark Wonnacott (instructed by Gosschalks, of Hull) appeared for the first defendant.
Eileen O’Grady, barrister
