Commercial lease – Renewal – Terms – Claimant tenant making unopposed application for renewal of lease – Parties failing to agree certain terms of new lease – Court being asked to determine length of and rent payable under new lease – Court making determinations.
The claimant tenant held a reversionary lease of supermarket premises in Sandbach, Cheshire which it occupied for the retail sale of chilled and frozen foods. The claimant had been in occupation of the ground and first floor premises for over 20 years. The defendant landlord was registered as proprietor of the freehold title to the premises. The contractual term of the lease expired in 2011 but the claimant remained in occupation under a statutory continuation tenancy.
The claimant requested a new tenancy of the premises pursuant to section 26 of the Landlord and Tenant Act 1954. The defendant did not object to the grant of a new tenancy but the parties disagreed as to its terms. The claimant proposed the grant of a new lease comprising the whole of its current holding for a term of five years at an annual rent of £37,500 per annum. The defendant argued that the new lease should be for a term of 15 years at a rent of £182,350 per annum subject to an upward only rent review operative on the fifth and tenth years of the term. The parties otherwise agreed the terms of the new lease subject to the court determining its term and the rent payable.
Held: The court made the determinations.
(1) Under section 33 of the 1954 Act, the court might grant a new tenancy on such terms as it determined to be reasonable in all the circumstances. The words “reasonable in all the circumstances” conferred on the court a wide discretion, but one which had to be exercised consistently with the policy of the Act and required the court to weigh the interests of both the landlord and tenant, which might, for example, justify the inclusion of a break clause. Each application for a renewal tenancy turned on its own facts. The court would seek to confer upon the tenant a term sufficient to protect the tenant in the carrying on of his business; the primary purpose of the legislation was to protect the tenant. It was perfectly valid for a landlord to seek to maximise the value and marketability of its reversion but any paper diminution would be ignored. What was likely to be granted in the market was of only limited value in assisting the court in determining, in the exercise of its discretion, what was reasonable. Any rigid policy of either party as to the length of term to be taken or granted was irrelevant to the exercise of the court’s discretion. The determination of the duration of the length of the term was an exercise of discretion with the court seeking to strike a balance between the degree of protection to which the tenant was entitled in the exercise of his business interests and the need to ensure that the decision was neither unfair on or oppressive to the landlord.
In the present case, striking a proper balance between the interests of the claimant and the defendant, the correct lease term was 10 years without a tenant break option. Bearing in mind that the contractual term of the reversionary lease was 35 years (coupled with an additional seven years under the lease), that the claimant had been in occupation for approximately 20 years and that these were dated premises with a limited life and market, a ten year term struck a reasonable balance between the parties’ competing interests.
(2) The court had to determine the rent at which, having regard to the terms of the tenancy, the holding might reasonably be expected to be let in the open market by a willing lessor but 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 carrying on there of the business of the tenant, any effect on rent of an improvement and, in the case of a holding comprising licensed premises, any addition to its value attributable to the licence, if it appeared to the court that having regard to the terms of the current tenancy and any other relevant circumstances the benefit of the licence belonged to the tenant: section 34(1) of the 1954 Act. The determination of the rent was on the assumption of a hypothetical letting in which the claimant’s occupation was disregarded. However, the court had to have regard to the actual state of the premises and their location and the state of the letting market generally: Baptist v Gray’s Inn [1993] 2 EGLR 136 applied.
The determination of an open market rent largely depended on expert valuation evidence which was usually based on evidence of comparable transactions and the weight to be attached to evidence of comparable transactions varied depending on the quality of the evidence provided, with the court preferring evidence of rents negotiated at arm’s length between valuers in open market lettings, and to a lesser extent lease renewals or rent reviews. The court was not satisfied that it was appropriate or helpful to consider rental evidence set by arbitration awards or possibly even determined by other courts in 1954 Act renewal proceedings: Land Securities plc v Westminster City Council [1993] 1 WLR 286 followed.
In the present case, the market for the subject premises was extremely limited. The correct method of valuation was to adopt an overall dual rate using convenience store rates and to a lesser extent the equivalent zone A rates, where appropriate, as a useful check and balance. Standing back and viewing the premises and their location generally, it was difficult to see any retailer requiring the first floor space or at least agreeing to pay a market rent for it, and would probably ‘mothball’ the first floor or make such limited or non-essential use of it as to reflect that in its likely rental bid. It followed therefore that in order to arrive at a sensible and realistic market rental valuation, it was appropriate to adopt a dual rate, being a market rent for the ground floor retail accommodation and a discounted rent for the ancillary accommodation, principally the first floor. In all the circumstances, weighing the proposed figures against comparable properties, the rent at which the premises might reasonably be expected to be let in the open market in accordance with section 34 of the 1954 Act was £63,000 per annum, subject to a review after five years.
Timothy Harry (instructed by Hill Dickinson LLP) appeared for the claimant; Ian Foster (instructed by Fladgate LLP) appeared for the defendant.
Eileen O’Grady, barrister
