A flurry of recent property litigation cases will interest landlords and tenants negotiating rents on renewals under the Landlord and Tenant Act 1954 (“LTA 1954”).
Under s.34 of the LTA 1954, the parties can ask the Courts to determine the rent to be paid under a renewal lease. The Courts look at comparable evidence when deciding on rent but must disregard any impact of the tenant already occupying the premises.
The problem with this approach is that the evidence reviewed by the courts will show the headline rents under comparable leases – but will not take into account any rent-free periods which applied to those leases for fit-out works.
A tenant under a renewal lease will be already in occupation, and therefore the full level of rent determined by the Court will be payable from the commencement of the new lease. Recent case law has debated whether that headline rent should be reduced to consider the fact that these comparable rents were subject to a rent-free period.
In May 2021, the Court heard the case of HPUT Trustee No 1 v Boots Limited. Boots argued that a new incoming hypothetical tenant would need a period for fitting out, and a rent-free period would be agreed between the parties – and that this should be considered when determining the rent under Boots’ renewal lease.
However, the Court found that as there was no rent-free period in the new lease, the full s.34 rent was payable from term commencement, and no discount should be applied – this follows the “presumption of reality”. 1-0 to landlords!
Just over 18 months later, in December 2022, the case of Old Street Retail Trustee (Jersey) 1 Limited v GB Healthcare Limited came before the Courts. The judge, in that case, disagreed with the decision made in the Boots case and found that the correct approach was to evaluate what the rents for the comparable lettings would have been had no rent-free periods been applied. Those rents would form the basis of the rent determination under s.34.
The result of that determination was that the full rent-free period was deducted from the headline rent, resulting in a net effective rent – and tenants balancing the score sheet.
It is clear that there is much debate in the judicial system as to whether (and how) rent free periods should be taken into account in lease renewals.
As such, until the point is determined by the Court of Appeal, negotiations between landlords and tenants regarding the appropriate level of rent will remain contentious.
Myerson’s Property Litigation team are expert in rent agreements. We have a wide range of experience in these cases and can help you to understand your options and guide you through the process, so please get in touch.
