Be aware of the consequences of negotiating an early break right in a renewal lease. The flexibility that this might bring will come at a cost. On a 1954 Act lease renewal, the court has power to determine the rent for the renewal lease. The Court assesses the rent for which those premises “might reasonably be expected to be let in the open market by a willing lessor” (Section 34 of the Landlord and Tenant Act 1954).
In the case of Britel Fund Trustees Limited v B&Q plc, the question of the rent was the only issue outstanding in the lease renewal. The subject premises in this case was a DIY warehouse in Tottenham. The rent paid at the end of the old lease was £776,139 pa.
The parties had agreed the new lease would have a rolling break after a short period which could be exercised on just six months’ notice.
Two questions arose, which are of interest to those of us involved in negotiating (and litigating) lease renewals.
- Whether any allowance should be made for a three month rent free period. The court took this point fairly quickly and followed recent court decisions where such rent free periods have been accepted as the norm to allow for some of the hypothetical fit out costs. It therefore applied a discount to the rent of 2.5%, applying the rent free period over the ten year term of the lease.
- What was the impact of the break clause on rent? Initially both parties agreed the way forward was to ascertain the open market rent to a DIY retailer tenant and then discount that to take the break clause into account. The landlord’s expert said that would make the rent £698,500 and the tenant’s expert said it would be £281,000. Naturally the parties’ discounts differed. However, this was immaterial in the end because the experts went on to concede, in Court, that actually no DIY retailer would take a lease with such a potentially short term. The tenant argued that the only potential tenant would be a discounter.
The court agreed with the tenant, but as the experts only conceded in Court there was no comparable evidence available to the court at such a late stage to assist in calculating what the market rent should be. The court, did what it could with the information available, and found that the market rent payable by a DIY retailer would be £603,100 and by a discounter £466,940. A discount then had to be applied to take into account the break clause. Ironically, the discount for a discounter would be less than for DIY retailer, because of the nature of its business and, in the absence of comparables, the court held that the discount would be 20% for the discounter and 25% for DIY retailer. This took the rent to just £373,700 from the £698,000 the landlord had been requesting.