The UK High Court considers the impact of COVID-19 on rent assessment in lease renewal proceedings

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In S. Franses Limited v The Cavendish Hotel (London) Limited [2021] the High Court had to determine a number of issues including, importantly, what rent would be payable by the tenant under the terms of its renewal leases of retail premises in Jermyn Street, London. 

The decision follows a protracted dispute between the tenant, S. Franses, and the landlord, the Cavendish Hotel, which began in 2015 when the landlord opposed the tenant’s application to renew its two leases of 80 Jermyn Street pursuant to the Landlord and Tenant Act 1954 (1954 Act) on the basis that the landlord intended to redevelop the premises. 

Whether the landlord had the necessary intention to redevelop the premises went all the way to the Supreme Court which, in 2018, found in favour of S Franses. 

The result of the Supreme Court’s decision was that the tenant was entitled to renew its leases, and it is the terms of those renewal leases that were in issue in the current proceedings.

Background

The tenant, a textile dealer "specialising in antique tapestries", occupied premises at 80 Jermyn Street.  The tenant’s two leases of the premises had expired in 2016, but were continuing pursuant to the 1954 Act. 

The landlord and tenant had been negotiating terms for the renewal leases since the Supreme Court’s decision in 2018 and, by the time of the hearing, most terms had been agreed.  However, a number of terms remained outstanding including the appropriate level of rent. 

The parties had also been unable to agree an interim rent which, in accordance with the 1954 Act, is broadly payable from the contractual expiry of a tenant’s existing lease until the commencement of any renewal lease. Given the leases had contractually expired some six years ago, this was a significant point.

Renewal lease rent

Both parties relied on expert valuation evidence as to the appropriate rent to be paid during the term of the renewal leases. 

By the time the matter reached trial, the tenant’s expert considered that a renewal rent of £96,500 per annum was appropriate whilst the landlord’s expert put the figure at £174,750. Both of these figures were well below the passing rent of £220,000 per annum under the tenant’s existing leases.

The judgment sets out in detail the various considerations taken into account by the Court when considering the appropriate rent. 

It is worth noting that the Court was not overly impressed with either party’s expert valuer, commenting on "the unhelpfully partisan approach taken by the experts".  The Court concluded that some of the tenant’s expert evidence did not "merit any weight" and that the landlord’s expert’s "general approach was partial and unbalanced".  However, what is of most interest is what the Court said in relation to the impact of the COVID pandemic. 

Although at trial there had been a fair amount of discussion and evidence regarding a COVID discount, during which the landlord’s expert valuer had accepted that an appropriate discount to assume for post-COVID rents would be "probably in excess of 30%", the judge did not attribute any particular fixed percentage reduction in rental values as a result of the pandemic.   Instead, the judge relied on a traditional rent zoning methodology and arrived at a reduced Zone A rent which reflected recent post-COVID comparable evidence.  

Overall, the judge’s conclusion was that an appropriate rent for the renewal leases would be £102,000 per annum, less than half the passing rent under the previous leases.

Interim rent

Generally, when parties are dealing with a renewal lease under the 1954 Act, interim rent will be determined pursuant to section 24C of the 1954 Act which provides that, save for certain circumstances, the interim rent will be the same rent as under the renewal lease.

However, in the current case, section 24D of the 1954 Act applied rather than section 24C.  This was because the landlord had initially opposed the tenant’s renewal of its leases. 

Under section 24D, there is no general assumption that the interim rent will be the same rent as under the new lease and, instead, the interim rent is to be assessed according to what a tenant would pay on a tenancy "from year to year". 

It is usually the case that when assessing the appropriate rent of premises subject to a tenancy from year to year, this will be less than the market rent of premises let, say, on a five year term.  One important reason for this is because a year to year tenancy does not provide a tenant with much certainty of occupation.

The judge accepted the tenant’s evidence that as at January 2016 the market rent for a year to year tenancy was £140,650.  However, the judge considered "this too low for at least the first 3.5 years of the occupation both because of the difference between it and the passing rent at the end of the existing tenancy but also because of the evidence about the market value of Jermyn Street properties over that time."

Therefore, applying the "standing back and feels about right test", the judge concluded that an interim rent of £160,000 per annum was appropriate.

What does this decision tell us?

One important point that comes out of this judgment is that the Court will not be assisted by partisan experts, and it will be in both parties’ interests to ensure that their experts act objectively and are aware of their overriding duty to the Court.

Further, although this case does not provide any new law, it is of interest to landlords and tenants alike in indicating what factors the Courts may take into account when considering renewal rents during the course of the pandemic.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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