Judge Chooses Reality Over Fiction in Lease Renewal
Tuesday 28th June 2022
A May 2021 court case has recently been reported. It was the first of 123 lease renewal claims between investment landlords and Boots, a tenant with an appetite for litigation and which was no doubt worried about the sale of sun cream during the pandemic. This case is related to Boots’ Bridlington store.
The judge made important rulings about (i) whether a renewal lease rent should assume a notional rent-free period, and (ii) the length of a new lease. The case was heard in the lowest level of court, the County Court, as is usual for lease renewals, but the judge’s decision wasn’t in line with other recent decisions.
What was the position before?
Before this case, there had been a clear trend toward assuming that a hypothetical tenant will need a rent-free period in which to fit the premises out, reducing the net rent payable from the first day of the new lease.
The courts’ approach to the length of new leases has been more varied in the past, as each one depends on the particular challenges facing that particular landlord and particular tenant. In Iceland v Castlebrook [2014] the judge appeared to want to “meet in the middle”, which is not really how the statute is supposed to work. The judge, in this case, decided to grant Boots’ request for flexibility.
Should a rent-free period be factored into the rent?
The landlord argued that the court should consider the “principle of reality” and not make assumptions inconsistent with the known facts. The judge agreed, deciding that the requirement in section 34 of the Landlord and Tenant Act 1954 to value the rent at a level that the property might “reasonably be expected to be let in the open market” meant that the reality of Boots’ circumstances must be taken into account: “The reality here is that the tenant does not need an inducement in this case and specifically does not need a rent-free period… it would be illogical for one to be built into the calculation”.
The judge said that the reality here was that the renewal was a continuation of Boots’ trading and so they wouldn’t need to refit the premises.
How long should the new lease be?
It wasn’t all bad news for Boots. The previous lease was for 15 years and the landlord wanted a ten-year renewal term with no break. Boots successfully secured a five-year term with a break at year three, arguing that a shorter term and flexibility were necessary due to the pandemic and uncertain economic climate. The judge agreed. It may be relevant that the pandemic was possibly more of a concern then than it is now, and that this is a store in a smaller town, not a major retail destination where space can be more profitable.
Conclusion
Although cases always depend on their facts, this decision gives landlords and valuers a reference point in future negotiations for lease renewals. We can’t assume courts will allow a default rent-free period to tenants holding over, or that landlords will secure a five or ten-year term without a break.
We will soon see whether this decision was a one-off or the start of a new trend. Many similar cases are in the pipeline, just as the summer holidays arrive and the crowds flock to Bridlington and, perhaps, pop into Boots to buy their sun cream.
