The decision in Iceland Foods Ltd v Castlebrook Holdings [2014] PLSCS 95 (CC) demonstrates the approach of the Court in determining suitable terms for commercial lease renewals  under the Landlord and Tenant Act 1954 (the “Act”).

The facts

Iceland Foods Ltd (“Iceland”) held the assigned lease of a high street retail unit in Sandbach. The  unit comprised almost 10,000 square feet, divided over the ground and  first floor - the latter of  limited use to Iceland. The assigned lease expired in December 2011 so in anticipation, in January  2011, Iceland served a s.26 Notice to continue in occupation. The freeholder served a counter-notice not opposing the grant. However, shortly  afterwards, Castlebrook Holdings (“Castlebrook”) acquired the reversionary interest from the  freeholder.

In a Part 8 Claim, Iceland reiterated its proposal for the new Lease terms: a five year term; the  passing rent of GBP 37,500 pa; and otherwise identical terms to its previous Lease, subject to  usual modernisation provisions.

Castlebrook did not oppose the renewal. However, it counter-proposed with the following changes: a  fifteen year term; a starting rate of GBP 182,350 pa; and five year rent reviews.

Renewal term

At trial, Iceland argued that it operated in a competitive industry. Market volatility and  underperformance meant that long-term commitments were too inflexible for its business. Castlebrook  asserted that fifteen years was the standard term in modern leases.

The Judge looked to s.33 of the Act:

“…determined by the court to be reasonable in all the circumstances…not exceeding [fifteen] years…

and highlighted its lack of reference to market conditions. The Court resolved to balance the  interests of the landlord and tenant in light of this. The Judge deliberated on the declining  profits produced from the unit, despite Iceland as a whole self-publicising its success through the  recession, Iceland’s occupation of the premises for over twenty years of the original 35 year lease  and the individual policies of the parties.

A ten year term was found reasonable in honouring the primary purpose of the Act - protecting the carrying on of tenants’ businesses. It would encourage capital expenditure but would not diminish the value of  Castlebrook’s reversionary interest. The internal policies of the parties were irrelevant in this  decision.

Rent

In contrast, section 34(1) does refer to market conditions when assessing rent:

“The rent payable…that at which…the holding might reasonably be expected to be let in the open  market…”.

Disregarding Iceland’s previous occupation and any goodwill, the Court weighted expert evidence.  Freely negotiated lettings were preferential to renewals and reviews whereas arbitration awards or  renewal proceedings were ignored. Additionally, the location and specific market of the unit were  taken into account, alongside the changing demographic of local retail culture. Where evidence was  lacking, convenience stores and zone A rates were utilised.

The first floor of the unit was discounted due to its relative lack of trader use whilst a market  rate was allocated to the ground floor. The Court ordered a rent of GBP 63,000 subject to review  after five years.

Conclusion

Although not a binding ruling, this case gives greater incentive for both landlords and tenants to  agree renewal terms outside of Court. Companies should desist from relying completely on internal  policies as the Court is only concerned with what is fair between the parties and will consider  each case on its own merits. Courts will no longer refrain from ordering tenants to take longer  terms than they request, but they will consider local market trends to decide rental values and  separately assess the usability of