The recent decision in Iceland Foods Limited v Castlebrook Holdings Limited provides a rare insight into the considerations of the court when determining the length of term and annual rent on a 1954 Act lease renewal.
The case related to a supermarket in Cheshire that had been occupied by Iceland for 20 years. Iceland sought a renewal lease of the premises for a five-year term. It argued that the volatile market conditions meant that a shorter term of five years would be appropriate. The landlord disagreed and argued for a 15-year lease term. It relied upon evidence of other supermarkets in the locality that had recently been let for 15-year lease terms. The parties also disagreed about the correct annual rent for the new lease.
The court determined that the renewal lease should be for a term of 10 years, as this struck a reasonable balance between the tenant’s need for flexibility and the landlord’s desire to protect its investment and it was therefore a reasonable and pragmatic compromise.
In reaching this decision, the court weighed up the need to protect the tenant’s business, which is the primary aim of the legislation, and the need to be fair to the landlord. The court did not feel that evidence of the length of term granted for comparable properties was relevant. It said that each case should turn on its own facts. Prior to the Iceland case, the tendency has been for courts to accept the length of term sought by the tenant. Iceland illustrates that when it comes to the term of the renewal lease the courts will look at the landlord and tenant’s competing claims and seek to reach a workable compromise.
The court, in determining the rent, carried out a very different analysis. It undertook a close analysis of the particular market for supermarkets, focusing on the location of this particular supermarket. The court noted that with the growth of smaller convenience stores, the market for supermarket premises had changed, and that there was a need to rely on recent comparables rather than historic arrangements. The court also stressed that comparables from other areas of the country were not helpful, particularly where the areas were not demographically similar to the area being discussed.
The lesson from this case is clear: precise and current market comparables from demographically similar areas are a significant factor when determining the rent on a renewal lease but when it comes to assessing the length of the term, the court will focus on the evidence presented by the parties as to why they require a particular term and not on any market comparables.
Parties involved in lease renewals should be aware of the differing analyses the courts will adopt when considering the rent and term length on a lease renewal – they should be prepared to produce evidence of comparable properties in the locality for the purpose of the rent analysis and evidence as to why they require a particular length of term so that the court can strike a balance between the parties’ competing interests when deciding the term length.