In the unreported case of Britel Fund Trustees Limited v B&Q PLC, the Court determined the rent pursuant to section 34 of the LTA 1954 and the case sets out the considerations taken into account and in particular how a break clause impacted on the rent payable and whether an allowance should be made for a rent free period.
The case was heard in the County Court of Central London in March 2016 and concerned a renewal lease under the LTA 1954 for a property which was a purpose built retail DIY warehouse in Tottenham comprising approximately 37,000 square feet. The parties had agreed all terms except for rent.
The passing rent was £776,139 per annum. Importantly, the parties had agreed an early mutual rolling break on or after 30 June 2018 (with six months' notice). The view of the landlord's expert was that the market rent was £698,500 per annum. The tenant's expert considered it to be £281,000 per annum. The Court was therefore to determine the rent pursuant to section 34 of the LTA 1954.
Section 34 of the LTA 1954 states as follows:
“The rent payable under a tenancy granted by order of the court under this Part of this Act shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the court to be that at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing lessor, there being disregarded—
(a) any effect on rent of the fact that the tenant has or his predecessors in title have been in occupation of the holding,
(b) any goodwill attached to the holding by reason of the carrying on thereat of the business of the tenant (whether by him or by a predecessor of his in that business),
(c) any effect on rent of an improvement to which this paragraph applies,
(3) Where the rent is determined by the court the court may, if it thinks fit, further determine that the terms of the tenancy shall include such provision for varying the rent as may be specified in the determination."
There were two main issues highlighted in the case as follows:
- Whether allowance should be made for a three month rent free period.
- Determining the open market rent for the lease with the early mutual rolling break clause (which could be operated after 2.5 years).
Issue 1 - rent free period
HH Judge John Mitchell made reference to the conflicting County Court decisions in respect of rent free periods but highlighted that recent decisions had been in favour of a holiday discount to reflect costs and time to fit out premises. The Court held that a rent free period of three months would be granted in this case and was to be applied over the entire term of the lease (ten years) resulting in a rental discount of 2.5%. The Court made reference to the fact that when considering comparables it is important that this is done on a like for like basis.
Issue 2 - determining the market rent
The Judge made reference to the break clause complicating how to determine the open market rent. The parties initially agreed that the open market rent for a ten year lease to a DIY retailer without a break clause should be ascertained and then discounted to take the break clause into account. The landlord argued for a discount of 10% and the tenant 50%. On the second day of the hearing, both experts conceded that this exercise was artificial as no DIY retailer would in fact take a lease with such an early break clause. The tenant argued that the only potential tenant would be a discounter; that is a tenant who trades at a discount and who would carry out a quick fit out of the premises. The Court agreed that the market rent should be ascertained on the basis of the hypothetical tenant being a discounter. Given this late concession, there was no comparable evidence to assist the Court in establishing what the market rent would be for such a letting.
The Court held that the market rent payable by a DIY retailer was £603,100 pre annum and for a discounter £466,940 per annum. It was then necessary for the Court to consider the early break clause and what discount to apply in relation to it. It was agreed that the discount for a discounter would be less. The Judge made reference to doing the best he could in the absence of comparables and held that the discount for a DIY retailer was 25% and 20% for a discounter. The market rent for a discounter was therefore ascertained to be £373,700 per annum.
This case highlights that landlords should bear in mind that in a lease renewal situation an early break clause is likely to have a significant impact on the market value of the property. It is clear from this case that the likely identity of the hypothetical tenant also needs to be carefully considered. In this case, the experts conceded during the hearing that in reality the hypothetical tenant they had both considered (a DIY retailer) would not in fact be a "willing lessee" of a lease with an early break clause. This was accordingly taken into account by the court, the effect of which was to reduce the market value even further.
It should also be borne in mind that the Court may adjust market rent to take into account a rent free period and that comparable evidence should be carefully reviewed to ensure the comparisons are like for like and appropriate adjustments made.
The judgment contains a detailed analysis of comparables and the factors to be considered and suggested adjustments to be taken into account so will no doubt be a helpful reference point for experts involved in lease renewal cases.
The case is a helpful example of the Court applying section 34 of the LTA 1954 and how the market rent was ascertained taking into account the terms of the tenancy and the identity of a willing lessor; all of which significantly impacted the Court's determination in respect of the market value of the property.
This article was first published on the Practical Law Dispute Resolution blog in June 2016.