Landlord and Tenant – Business tenancy – Renewal – Claimant tenant serving notice on respondent landlord requesting new business tenancy – Defendant opposing application relying on intention to convert premises into two units – Claimant establishing right to new lease – Issues arising as to terms of new lease – Whether fairness requiring change to bargain represented by existing lease – Whether adjustments required to ensure rent reasonable – Whether adjustment required to interim rent – Issues determined accordingly
The claimant was a textile dealership and consultancy specialising in antique tapestries and textile art whose premises were at 80 Jermyn Street, London SW1 and were part of the Cavendish Hotel building. The defendant was the claimant’s landlord, which owned and ran the hotel.
The claimant held the property under two separate leases whose contractual expiry date was 2 January 2016. The claimant sought new leases under Part II of the Landlord and Tenant Act 1954 by notice dated 16 March 2015.
The claimant’s right to such leases was dealt with as a preliminary issue and resolved by the Supreme Court in favour of the claimant: S Franses v The Cavendish Hotel (London) Ltd [2018] UKSC 62; [2019] EGLR 4.
It was agreed that the leases were to be for 15-year terms (the maximum term under the 1954 Act) with five-year rent reviews and no break clauses. The issues to be determined in the present proceedings were: (i) four disputed lease terms; (ii) the new rent; and (iii) the interim rent.
The rent for the new tenancies was a major battleground and made more difficult by upheaval in the property market due to the Covid-19 pandemic and the absence of comparables. By the time of trial, both valuers had reduced their rental valuations from their original expert reports, in light of the large number of vacancies on Jermyn Street and the limited transactional evidence available.
Held: The issues were determined accordingly.
(1) Pursuant to section 35 of the 1954 Act, the court should have regard to the terms of the current tenancy and to all relevant circumstances. There was an onus on the party seeking change from the terms to justify the change. A mere increase or reduction in the rent payable did not of itself justify the change. It was the court, not market forces, which determined the terms of the tenancy. Subject to having regard to the terms of the current lease, the court had a wide discretion, having regard to the almost infinitely varying circumstances of individual leases, properties, businesses and parties involved in business tenancies. However, if the terms of the current tenancy were obsolete or deficient, the court would consider that an adequate reason for change. Ultimately, the issue was one of essential fairness as between landlord and tenant, but the reasons for change had to be justified: O’May v City of London Real Property Ltd [1983] AC 726 followed.
(2) A proposed change to the lease by the landlord, said to be of benefit to the tenant but likely to increase the market rent, would be outside the fairness requirement since it would impose an additional financial burden on the tenant’s business. The court’s powers would generally fall to be exercised, as here, on terms which the parties had been unable to agree. Without such agreement, the court should only make a change to the bargain represented by the existing lease if it was satisfied that fairness requires it: Charles Clements (London) Ltd v Rank City Wall Ltd [1978] 1 EGLR 47 considered.
(3) As a matter of settled practicality, the court would determine the rent at the date of the hearing but having regard to evidence pointing toward relevant market changes likely to occur by the valuation date.
The willing lessor and willing lessee envisaged by the 1954 Act were hypothetical abstractions and did not share characteristics or personal circumstances with the actual landlord and tenant or any actual landlord and tenant. That process addressed the disputed rent issue by taking the subject property, the actual market (a matter of evidence) and the actual new lease terms (as agreed between the parties or decided by the court) and so determining a market rent for the lease for the property rather than a rent which flexed because of a particular characteristic of any actual landlord or tenant. Subject to the disregards stated in section 34, it was the characteristics of the property and the lease which determined where in the market the rent fell, not imagined characteristics of the hypothetical participants in the process by which the court determined the figure: Lovely & Orchard Services Ltd v Daejan Investments (Grove Hall) Ltd [1978] 1 EGLR 44 considered.
Standing back and taking into account all the evidence, bearing in mind the unique circumstances which provided the market context for the valuation, and using the traditional zoning methodology rather than assuming any particular percentage reduction in rental valuations attributable to Covid, the rent under the new lease should be £102,000 per annum: Marklands Ltd v Virgin Retail Ltd [2004] 2 EGLR 43 followed.
(3) In determining the interim rent under section 24D of the 1954 Act, the court had to identify the rent for a tenancy from year to year using the section 34 method; consider whether any modification might be required because of the rent level under the prior tenancy (most often but not exclusively where a tenant should be protected from a sudden substantial increase in rent by “cushioning”); and ensure that the determined rent was one that was reasonable for the tenant to pay bearing in mind the benefit conferred: Humber Oil Terminals Trustee Ltd v Associated British Ports [2012] EWHC 1336 (Ch) followed.
(4) Guided by Humber Oil, the starting point in determining the interim rent was to consider the language of section 24D(1) of the 1954 Act and ask what it was reasonable for the claimant to pay while the claimant had occupied the property because of the deemed extension of the prior tenancy under section 24 of the 1954 Act. That asked the court to look at the period of occupation and ensure that the rent was reasonable, balancing the interests of the landlord and the tenant.
Adopting a necessarily broad brush, aiming to value the period and arrive at an interim rent which could be expressed on a per annum basis, the annual rent for the period from 3 January 2016 to the start of the new tenancy should be £160,000 per annum.
Joanne Wicks QC (instructed by David Cooper & Co) appeared for the claimant; Wayne Clark (instructed by Maples Teesdale LLP) appeared for the defendant.
Eileen O’Grady, barrister
Click here to read a transcript of S Franses Ltd v Cavendish Hotel (London) Ltd
