Landlord and tenant – Renewal of lease – Landlord and Tenant Act 1954 – Defendant tenant making unopposed application for new tenancy – Dispute as to rent payable under new lease – Most appropriate comparable properties for assessing rent – Whether new rent to be adjusted to take into account whole of rent-free period – Whether exclusivity adjustment to be added to new rent – Rent determined accordingly
The claimant landlord applied under section 24 of the Landlord and Tenant Act 1954 for the grant to the defendant tenant of a new tenancy of a retail unit at 199 Old Street, in the London Borough of Islington, from which the defendant traded as a pharmacy.
The terms of the new lease were agreed, apart from the rent and interim rent, which it was agreed should be the same as the rent payable under the new lease.
Under section 34(1) of the Landlord and Tenant Act 1954, the rent payable under a tenancy granted by order of the court was the sum 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 disregarding: (a) any effect of the occupation by the tenant or its predecessors; (b) any goodwill attached to the holding by reason of the business; and (c) any effect on rent of improvements.
It was common ground that there were no relevant improvements, so that section 34(1)(c) was not relevant. The court had to determine the open market rent by reference to the state of the market at the date of the hearing subject to any evidence indicating that changes would occur between that date and the commencement of the new tenancy: see Lovely & Orchard Services Ltd v Daejan Investments (Grove Hall) Ltd [1978] 1 EGLR 44.
Held: The rent was determined accordingly.
(1) When determining rent for the purposes of section 34 of the 1954 Act, it was commonly accepted between experts that the appropriate valuation method was the comparable method of valuation under which valuation essentially proceeded by analogy. In the case of a property valuation, the analogues were usually called “comparables”. Typical adjustments would reflect differences between the comparables in location, terms of letting and so on. One obvious difference between different properties was that they would be of different sizes: Marklands Ltd v Virgin Retail Ltd [2003] EWHC 3428 (Ch); [2004] 2 EGLR 43 followed.
In the present case, the parties agreed that the appropriate method of valuing the subject property was the zoning method, which divided the ground floor area into sections, or zones, each having a standard depth measurement of 20 feet (6.1m). Once the individual areas of each zone had been calculated, they were added together to calculate the net internal area (NIA).
The “halving back” method was then applied. It was assumed that if each square of zone A was worth the most (being the area at the front of the premises), then each square of zone B was worth half the appropriate zone A rate, each square of zone C was worth half of zone B (and therefore a quarter of zone A) and each square of zone D was worth one eighth of zone A. The remainder of the premises was considered at a single rate relative to zone A.
In the present case, the most reliable comparable evidence came from the parade of which the unit formed part, and it was appropriate to rely on the evidence of open market lettings in the parade and to analyse them using the zoning method.
(2) The statutory purpose or aim of section 34(1)(a) was to ensure that the rent payable reflected the real market value of the subject property in a hypothetical transaction where the landlord was willing and the tenant was not a sitting tenant, and had no connection to the property. Section 34(1)(a) provided that the premises had to be envisaged as empty premises in the market. Further, the disregard in section 34(1)(a) was not limited to a sitting tenant overbid but any effect on rent of the fact that the tenant had or his predecessors in title had been in occupation of the holding.
In the present case, all but one of the comparable properties involved rent-free periods, which had been apportioned as a fitting out period and a rent incentive period. As a consequence, to comply with section 34(1)(a) and compare like with like, the court had to adjust the determined rent to take into account the rent-free period to arrive at the proper result: HMV Music v Mount Eden Land (17 January 2012, unreported) and HPUT Trustee No 1 v Boots UK (24 May 2021, unreported) considered.
By taking into account the whole of the rent-free period, the court was putting the parties in exactly the same position as they would be in if the new lease was being agreed in the real world without the tenant being a sitting tenant.
The rent payable under section 34(1) was the rent payable from day one. If the comparables were of rents payable by tenants who had rent-free periods, the determination by the court would be of a rent which was to be paid from day one of the term by reference to those comparables, but taking into account the fact that the tenant would not have a rent-free period under the new lease.
As a matter of construction, section 34(1) of the 1954 Act tasked the court with assessing the market rent for the property which a hypothetical tenant would pay. The four disregards in section 34(1) meant that factors which could lead the actual tenant to pay a higher rent were not considered when assessing the market rent.
(3) Under section 34(1)(d), the licence which permitted the defendant to trade as a dispensing chemist was to be disregarded. A hypothetical tenant, who might not even be a chemist, would not pay an additional sum for an exclusivity clause preventing other tenants in the parade from trading as a dispensing chemist. Therefore, section 34(1)(d) prohibited the addition of an exclusivity adjustment.
(4) The experts agreed that the net internal floor area of the property was 2,097 sq ft (194.8 sq m). The remainder should be assessed at A12, providing an NIA of 781.05 ITZA units. The starting point for assessing zone A was £192 per sq ft. Having regard to Covid-19 and the significantly deteriorating economic environment, a reduction of 25% should be made: 75% of £192 = £144.
Therefore, the rent payable under the new lease was £144 x 781 units = £112,464, rounded down to £112,000.
Stephen Jourdan KC (instructed by Dewar Hogan) appeared for the claimants; Brie Stevens-Hoare KC (instructed by Adams & Remers LLP) appeared for the defendant.
Eileen O’Grady, barrister
