Lawbite: Rent free periods and lease renewals – are we getting closer to settling the debate?

• United Kingdom

• Real estate
• Real estate dispute resolution
• Real estate litigation - LawBite

16-01-2023

Old Street Retail Trustee (Jersey) Ltd and Old Street Retails Trustee (Jersey) 2 Ltd v GB Healthcare (County Court at Central London)

A recent lease renewal decision from the County Court in Central London examines again whether to take into account rent free periods when assessing rent pursuant to s34 of Part II of the Landlord and Tenant Act 1954 (the 1954 Act). It will be of particular interest to landlords and tenants of commercial properties as well as valuation surveyors in their professional teams who advise on lease renewals.

The parties had reached an agreement on all but one of the terms of a new tenancy of retail premises in Old Street, London. Rent remained in dispute and needed to be determined by the court pursuant to s34 of the 1954 Act.

The landlord was willing to grant a tenancy at an annual rent of £148,000, but the tenant argued that the rent should be fixed at £45,000 per annum. Both parties produced expert evidence to support their respective positions.

A key question for the court to determine was whether or not the rent should be adjusted to reflect the absence of a rent free period which would usually be granted in the open market as an inducement to take the lease.

The tenant argued that all of the rent-free period should be amortised to arrive at what most people know as a net-net or day one rent.

The landlord argued that only the pure inducement element of a rent free period should be taken into account (i.e. the rent free attributed to the time it took to fit-out should be disregarded). Its view was that there was nothing in the drafting or purpose of s.34(1) to support the argument that the rent should be artificially depressed to reflect the absence of a fitting out rent-free period which the tenant does not need in reality.

The court decided that the full rent-free package should be taken into account and deducted. The court considered that adjusting the rent would place the parties in the same position as they would be in if a new lease was being granted in the real world, effectively ignoring the fact that the tenant in reality was a sitting tenant with the full benefit of beneficial occupation from day one.

Although the court did not agree with the landlord on the issue of inducements, it did largely favour the landlord’s expert’s evidence and ordered that the new rent be fixed at £112,000 per annum.

• there remains conflicting County Court decisions on the issue of whether rent-free periods should be taken into account when assessing the rent on renewal pursuant to s34. Initially, most practitioners assumed that both elements of the inducement package (the time taken to fit out and the pure inducement part) should be assumed not to have been given such that the tenant was paying rent from day one, without any element of incentive. In an unreported decision from 1996 involving Max Mara, the court held that the rent should assume that the fit out element had been given but not the pure inducement part, which then had to be discounted. That mirrors the usual post fit-out, pre-market incentive rent that rent reviews direct. The Court then reverted back to day one rents (i.e. the whole of the rent free must be taken into account when ascertaining the rent – both rent free for fit out and pure market incentive) in the decisions of HMV Music Ltd v Mount Eden Land [2012], Odey Asset Management Group Ltd v Telford [2016] and Britel Fund Trustee Limited v B&Q plc [2016]. In the more recent decision of HPUT Trustee 1 Limited and HPUT Trustee 2 Limited v Boots UK Limited [2021), however, the County Court in Central London went back to Max Mara and arrived at a post fit out, pre market incentive rent. The rationale was that in reality, the tenant would not be carrying out fit out works as it was already in occupation and operating from the premises (please see our LawBite on the decision: "Rent free or not rent free, that is the question"). Now we see that the Court has flipped back again to a day one rent in the latest decision in Old Street Retail Trustee (Jersey) 1 Ltd v GB Healthcare
• this decision adds to the debate but it must be remembered that these are all non-binding decisions. Until they are taken to appeal, the issue remains at large to argue each time
• the decision also re-states the position held by the Court of Appeal in the decision of Hoffman J (as he was at that point) in Land Securities plc v Westminster City Council [1993] 1 WLR 286, that arbitration awards are not admissible evidence in a lease renewal. The tenant’s valuation expert had sought to rely on a 2020 arbitration award to support its position but the court determined that that arbitration awards were inadmissible given Hoffman J’s decision. Many practitioners disagree with the rationale in that decision and, indeed, most rent review arbitration directions expressly provide that Expert Determinations and Arbitration Awards are indeed admissible, albeit at the lower end of the hierarchy of evidence