What term should the court fix when ordering the renewal of a business lease?

Where Part II of the Landlord and Tenant Act 1954 applies, the court can order landlords to renew business leases for terms of up to 15 years. Section 33 empowers the court to fix a term of such length as is “reasonable in all the circumstances”, beginning at the end of the current lease. Landlords often ask the court to grant longer leases to obtain a secure income stream, but may suggest a shorter lease if a property is ripe for redevelopment. By contrast, tenants may ask for longer leases, if this suits their business requirements, but generally prefer shorter leases, or leases with break clauses, to secure business flexibility. Iceland Foods Ltd v Castlebrook Holdings Ltd [2014] PLSCS 95 is an interesting county court decision. It concerned the length of a renewal lease of a supermarket in Sandbach. The tenant sought a new lease for a term of 5 years at a rent of £37,500 per annum. It explained that a term of this length would provide sufficient length and certainty to enable it to update plant and machinery, whilst maintaining flexibility in what were volatile market and local trading conditions. The tenant was facing significant competition and the store was underperforming. Consequently, it did not want a longer term. The landlord suggested a 15 year term, at a rent of £182,350 per annum, subject to review at five yearly intervals. It suggested that lease terms for comparable properties were 15 years (although statistics published by the British Property Federation suggest that average lease lengths may have fallen further still). The judge ruled that section 33 conferred a wide discretion on the court. However, the court must exercise its discretion consistently with the policy behind the legislation and must try to strike a balance between protecting the tenant, on the one hand, and ensuring that its decision is neither unfair on, or oppressive to, the landlord, on the other. It was perfectly valid for the landlord to try to maximise the value and marketability of its reversion (although any paper diminution would be ignored). However, the primary purpose of the legislation is to protect the tenant and the court must try to ensure that it has a lease that is long enough to protect its business. Each case will turn on its own particular facts and the parties’ policies as to the length of term that they will grant, or accept, are irrelevant. The court must weigh the interests of both parties and consider a wide variety of circumstances when deciding how long the new lease should be. The length of the old lease (which, in this case, was 42 years) is also a relevant consideration. Lease terms in the open market are of limited value when the court is determining what is reasonable. There was only a limited market for the premises and the court was satisfied that the correct lease term was 10 years (without a break option) at a rent of £63,000 per annum, subject to review after five years. This struck a proper balance between the competing interests of the parties and was for a period that the court considered reasonable in all the circumstances.   Allyson Colby is a property law consultant