In the recent lease renewal decision of Britel Fund Trustees Ltd v B&Q plc [2016] the court considered the various factors that had to be taken into account when determining the rent pursuant to s34 of the Landlord and Tenant Act 1954 (the “Act”).

Facts

The case concerned a lease renewal of a 37,000 square foot purpose built DIY warehouse in Tottenham Hale Retail Park, London. The parties had agreed all the terms for the new lease except for the rent, including, importantly, the insertion of an early mutual rolling break on or after 30 June 2018 (on six months’ notice).

The passing rent was £776,139 per annum. The landlord and tenant differed dramatically as to what should be the new level of rent. The landlord’s expert considered the market rent to be £698,500 per annum, whereas the tenant’s expert was of the view that it should be £281,000.

Key issues

The court had two main issues to consider in order to determine the rent correctly:

  1. Should allowance be made for a three month so called ‘Rental Holiday’?
  2. What impact would the early mutual break option have on the level of open market rent?

Should allowance be made for a three month so called ‘Rental Holiday’?

Noting the conflicting County Court decisions in relation to rent free periods, His Honour Judge John Mitchell ruled that, as the rent was being ascertained for a lease to be taken by a prospective lessee who was not already in occupation, it followed that there must be an element of logic when determining the benefit of a rent free period.

The Judge was satisfied that any retailer who operated out of premises such as this would require a fit out period in order to trade, and so, in the absence of special circumstances, a rent free holiday of three months would be granted.

The Judge then determined that it would be logical to apply the three month rent free period over the entirety of the term (120 months), meaning a rental discount of 2.5 per cent over the term of the renewal lease.

What impact would the early mutual break option have on the level of open market rent?

The parties agreed that the early mutual break clause significantly complicated the determination of the open market rent. There were also several other factors put forward by the experts which would have an effect but are not discussed in this article.

The approach initially agreed between the parties’ experts was that the market rent would be agreed, with a discount then applied to take into account the mutual break clause. The landlord’s expert argued for a discount of 10 per cent in the rent, the tenant’s expert believed the appropriate amount to be a 50 per cent deduction.

This approach was deemed artificial and dropped during the trial as both sides conceded that no DIY retailer would take a lease with such an early break clause, especially when the costs of fitting out and the potential length of the lease before the break was operated (2.5 years only) were taken into account. Instead, the approach adopted by the court was that the most likely tenant for a lease with the proposed mutual break option would be a discounter, a company that was willing to trade for a short term and carry out a cheap fitting/ stripping out. Therefore a discounter would be used as the hypothetical tenant in this instance.

The court held that the market rent payable by a DIY retailer was £603,100 per annum, and for a discounter £466,940 per annum. The appropriate discount in light of the mutual break clause would be 22.5 per cent for a DIY retailer and 20 per cent for a discounter.

Both valuers agreed that if another DIY retailer was looking for premises, they would not take the property with the break clause. Therefore the court accepted that the hypothetical tenant would be a discounter, and found the rent to be £373,700 per annum (£10.10 per square foot).

Key points to note

  1. As this is a County Court decision, it will not be binding on other County Courts (or any superior court). That said, it is a reasoned judgment that adopts a logical approach to the implementation of s34 of the Act and so may be judged to be of “persuasive” value in decisions going forward.
  2. The court has the power to, and is likely to, address market rent to take into account any rent free period. Accurate comparables are also very important.
  3. Each case will turn on its own facts, however, it is clear from this judgment that an early mutual break clause will have an impact on the market rent. The court’s approach to a hypothetical tenant should also be noted, as the court decided that the hypothetical tenant originally considered by the experts (a DIY retailer), would not be a “willing” tenant of a lease with such an early mutual break clause.

The judgment provides a useful analysis of the factors to be considered and suggests adjustments to be take into account when the court is left to determine the market rent.