You might think that market traders would be used to getting things their own way, and that is probably true when it comes to selling things like fruit, vegetables or meat, but for the tenants of Smithfield Market in London it proved a very different situation when it came to the renewal of their business tenancies, as the recent case of Edwards &Walkden (Norfolk) Ltd and others v City of London Corporation9 shows.
In this case the landlord, City of London Corporation, successfully argued that the terms of the renewal leases to be granted to the tenants of the market should depart from the existing lease terms and include separate rent and service charge provisions, rather than all inclusive rents.
Business lease renewals
In the majority of cases the parties to a business lease that is protected by Part II of the Landlord and Tenant Act 1954 (the “Act”) will reach agreement on the terms of the renewal lease by negotiation. However, the option is always open for the landlord or tenant to apply to the court for it to determine the terms of the renewal lease.
The starting point for the court in determining the terms of the renewal lease is the terms of the existing lease. Section 35 of the Act makes it clear that the court must “have regard” to the terms of the existing lease. Put simply a tenant is entitled to request a renewal lease on the same or similar terms to the existing lease.
If either party wants the renewal lease to include different terms than those included in the existing lease, then that party must demonstrate to the court that there is “good reason” why the court should depart from the existing lease terms10.
Inclusive or exclusive rent?
It was not disputed between the parties that the landlord should be were entitled to recover the costs of maintaining and providing services in Smithfield Market.
Leases granted in the 1980s had provided for separate rent and service charge. However, when extensive renovation works were carried out, some way into the terms of the leases, the parties agreed to modify the split rent and service charge to an inclusive rent, to take account of the disruption caused by the renovations.
The works were delayed. The parties entered into agreements for lease providing for the grant of new leases with separate provisions once the works were finished, but for an inclusive rent prior to then. There was a dispute between the parties and the leases were not completed.
The leases which fell to be renewed in the proceedings which went to court reflected the ongoing dispute between the parties. They provided for a temporary inclusive rent and some expressly provided for the issue of whether the rent should be inclusive or exclusive to be the subject of further negotiation or referal to the court upon renewal. Two leases simply provided for an inclusive rent.
In O’May the landlord had tried to argue, but ultimately without success, that the renewal lease should include a separate service charge provision on the basis that the rent payable by the tenant was reduced. The landlord relied on evidence of current market practice in support of its case.
The terms of the existing lease in O’May did not include any service charge provisions and therefore it had to convince the court to vary the terms of the existing lease. The House of Lords held that the landlord had failed to satisfy the burden that there was “good reason” to depart from the existing lease terms.
In Edwards, the court found that the City of London had demonstrated that there was “good reason” to depart from the terms of the existing leases and include a separate service charge provisions in the renewal leases.
The court in coming to this conclusion took into account various factors including:
- evidence of current market practice adduced by the City of London (in contrast to the decision in O’May);
- that the issue of whether or not there should be separate service charge provisions in the renewal lease had been specifically provided for by the parties in the existing lease; and
- that the parties were in agreement that the landlord was entitled to payment of its costs of providing services and maintaining the market.
This case is an important decision that endorses the rationale (if not the outcome) of the case of O'May and shows that the courts are prepared, in appropriate cases, to depart from the terms of the existing lease when determining the terms of renewal business tenancies where a party can demonstrate good reason to do so.