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The effect on lease renewal rent following the pandemic
When you enter into a commercial lease, your solicitor may talk to you about the lease being “contracted out” or not having “security of tenure”. What this means is that certain provisions of the Landlord and Tenant Act 1954 (“the 54 Act”) will not apply to the lease.
However, if a lease is within the 54 Act (i.e. if certain provisions of the 54 Act have not been excluded from the lease), the tenant at the end of the term may have an automatic right to renew their lease on substantially the same terms as the existing lease. If the parties cannot agree on the terms of the renewal lease, either party may apply to the court to decide the disputed terms.
The most commonly contested issues in a claim to the court under the 54 Act are the Annual Rent and Interim Rent. The Interim Rent is the rent payable in the interim period, i.e. between expiry of the existing lease and completion of the renewal lease.
Whilst the general rule for Interim Rent has been that the amount would be the same as the new Annual Rent under the renewal lease, that general rule will not apply if market conditions have changed. Clearly, the market has changed a great deal over recent months, as a result of Covid.
Before Covid, in an unopposed lease claim (i.e. a claim where both parties are agreed as to the renewal, but have not been able to agree certain terms of the new lease), each party would appoint a surveyor to act as an expert to provide the Court with comparable properties of similar size, use and term as evidence in favour of its suggested Annual Rent.
Due to the pandemic, we have seen reduced use of office space as increased numbers of staff work from home, and the negative impact on the high street, with businesses either struggling to continue to trade due to forced closures, or choosing to switch to online supply only. Whilst there are mixed opinions about what comes next in relation to negative effects of future variants and the PM’s message “to live with it”, the Court has the responsibility of deciding how Annual Rents and Interim Rents are decided, and whether the impact of the pandemic should be taken into account.
In December 2021, the Court decided in the case of Saville-Edells and another v Jain that:
- Covid has had a depressive effect on rents;
- There is still uncertainty amongst retailers about their future;
- Comparable properties are still relevant when deciding rents (in this case, the tenant provided a comparable of a property in the same building from December 2020, i.e. after the first lockdown);
- The Court is willing to depart from the rental figures proposed by the parties in the initial claim forms.
The background to the lease renewal, in this case, was that the claim was issued in April 2019, and due to be heard in April 2020, but was adjourned due to Covid and ultimately heard in October 2021. By this time, the Court had to consider (a) the rents pre-Covid (where the rental amounts were good); (b) the rents during Covid (where the rents were low, as most businesses had to adhere to the lockdown); and (c) the uncertainty of the rents in a world post-Covid.
The Court decided, in this case, that the Interim Rent should be based on a mix of both the good 2019 rental figures, and the poor 2020 rental figures. However, for renewal applications filed at court after March 2020, landlords may have difficultly arguing that pre-Covid rents should be considered when deciding the Interim Rent.
The latest decision suggests that the Court is looking at the wider picture and the effect that Covid has had on the high street and businesses.
It seems this 2021 decision, together with the new arbitration process for negotiating Covid rents, puts these negotiations in favour of the tenant. It will be interesting to see if tenants bringing a 54 Act claim move towards comparable rents in their area, or turnover rents due to the continued uncertainty of the market, and if the Court is willing to side with the tenant on other lease terms such as reduced terms, or incorporating tenant break rights, or even rent-free periods.
There is no doubt that, following this decision, tenants will now seek for rental reductions in their lease renewals, and landlords should be realistic about the values they are likely to achieve.
As a final note, remember that the notices which either party must serve to initiate renewal under the 54 Act (whether by the landlord or the tenant) must be served no less than six months and no more than 12 months before the party proposes that the new lease should commence, so it is really important to take advice well in advance of the termination date under the lease, if you wish to use the statutory renewal procedure.
Contact a member of our commercial property team for legal advice.