The case of Britel Fund Trustees v B&Q PLC  has considered how to assess rent under s.34 of the Landlord and Tenant Act 1954 when a renewal lease is to contain a very early break clause.
Britel Fund Trustees Limited was landlord of a unit in Tottenham Hale Retail Park (the landlord). It brought a claim against B & Q plc (the tenant) under the Landlord and Tenant Act 1954 (the Act) for the grant of a new tenancy. The property concerned was a large purpose built retail DIY warehouse.
The parties had agreed all the main terms of the new lease except for rent and interim rent. The annual passing rent was £20 per square foot (psf). The landlord proposed an annual rent for the new lease of £18.90psf and the tenant proposed £7.60psf. Both had valuation experts.
As the landlord had plans to develop the site, the parties had agreed a mutual break clause exercisable on six months' notice on or after 30 June 2018. They agreed that this would have a depreciatory effect on the rent under the new lease.
S.34 of the Act provides that, in the absence of agreement between the parties, the court can determine the rent for the new lease as that which, having regard to the terms of the tenancy, the property might reasonably be expected to be let in the open market by a willing tenant, disregarding certain items.
There were two main issues for the court to consider when determining the new rent:
- Should allowance be made for a three month rent free period?
- What was the open market rent for the lease with its break clause?
The parties agreed that the likely willing tenant for the purposes of s.34 was one of the main warehouse retailers. However, it was contended that the only potential tenant for a lease which included the break clause would be a discount retailer. This discounter would be willing to trade for a short term and would carry out a 'quick, cheap and dirty' fit out.
The court concluded that a two stage approach should be taken to determine the rent. Firstly the open market rent for a ten year lease without a break clause should be ascertained and secondly, that rent should be discounted to take account of the break clause. This approach should be undertaken first for a DIY retailer and then for a discounter before comparing the two results.
Rent free period
The case law on whether a rent free period should be applied is conflicting, due to the 'artificiality' of the s.34 exercise. Under s.34 it is assumed that the tenant has vacated the property and that it has removed all tenant fixtures. The court's view was that a retailer operating from the property would need to fit out in order to trade and that a three month rent free period should be granted. This period should be applied to the whole of the term, 120 months, resulting in a rental discount of 2.5%.
Open market rent
The court confirmed that one method of calculating the rent is by looking at comparable transactions, with their value depending on how similar those comparable are to the property in question. The court reviewed the DIY store comparables produced by the parties' experts. There was a limited level of demand for the property and there had been no increase in rents since 2007/2008. The fact that there was a high service charge, inadequate parking facilities and service yard were also relevant factors.
Because of the break clause, and fit out period, the willing tenant would have less than two and half years' trading. The landlord contended for a 10% discount for the break; the tenant argued for 50%. As there was no specific comparable evidence for such a break, the court found that a 25% discount was appropriate. The rent for a DIY retailer on the open market was therefore £12.22psf.
Neither expert had produced comparables for a discount retailer. The court therefore took the mid-point between the experts' suggested figures, resulting in a discount of 22.5%. The rent for a discounter on the open market was therefore £10.10psf.
The court concluded by saying that it had to choose between the DIY and discounter figures and that to simply split the difference would be 'unprincipled'. The experts agreed that no DIY retailer would take the premises with the break clause. The willing tenant could therefore only be the discounter, meaning a rent of £10.10psf.
The case confirms that:
- rent free periods can be taken into account when determining the rent for a renewal lease if the comparables support it
- early break clauses will have a depreciatory impact on the rent
- comparable evidence is very important for supporting your position; without it the court is likely to find a mid-point between the parties
- parties should consider carefully who the potential tenant for the premises would be and try and find relevant comparable evidence for that class of tenant