Commercial tenants who have a ‘protected tenancy’ under the Landlord & Tenant Act 1954 have an automatic right (protected by statute) to renew their lease at the end of the contractual term, on the same terms as their existing Lease.
Previously it has been thought that such a renewal would not include any rent-free period (as this is usually granted at the start of the term for fitting out purposes and in a renewal situation fitting out is obviously not required).
In the recent case Britel v B&Q the High Court found in favour of the tenant both in respect of them being allowed a rent free period, and also in factoring in an early Landlord break clause in determining that the level of renewal rent should be lower.
- Rent free period – B&Q successfully argued that their 1954 Act renewal should include a rent-free period equal to that which would be granted on an initial lease for ‘fitting out’ of 3 months. This 3-month rent-free period was amortalised over the whole lease term, leading to a discount on the final open market rent. The whole term of the lease was used for the calculation, even though there was an earlier break option. Accordingly, this decision is a useful authority for there being a 3-month rent-free period at the start of any renewal lease.
- Impact of early break right on Rent valuation – this case involved a large retail until in Tottenham (37,000 sqft) but was unusually subject to a mutual break right after 2.5 years of the term starting. The court decided no DIY retailer would take on such a short-term period of security and so it would likely be taken by a discount retailer instead, at a lower rent. The court looked at what the rents would be if there was no Landlord break at 2.5 years, and then assessed what discount should be given in respect of there being a break – 25% for a DIY retailer and 20% for a discounter. So the renewal rent was decided on the basis of a discounter taking the premises and subject to a 20% discount for the early break.
This case highlights that landlords need to bear in mind that the likely identity of the hypothetical tenant needs to be carefully considered in a lease renewal situation, and furthermore an early Landlord's break clause is likely to have a significant impact on the market value of the property. 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, and so this was accordingly taken into account by the court – the effect of which being 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.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.