The Court will have strong regard to the original commercial arrangement between the parties when fixing the terms for a new business tenancy.
The High Court has determined whether tenants can renew their Leases at a fixed rent without a variable service charge .
The tenants of stalls, shops and offices in the East and West and Poultry Markets at Smithfield Market in London sought new tenancies under the Landlord and Tenant Act 1954 on the basis that they should pay fully inclusive rents rather than be subject to unpredictable variable service charges for the costs of maintaining the historic meat and poultry market.
The tenants argued that such a provision was consistent with the current terms upon which they occupied and would be fair and reasonable as they needed some certainty as to future costs and fully inclusive rents would also protect them against inefficient management of the Market and against unforeseen major expenditure on the old buildings that constitute much of the Market.
The City argued that most of the original tenancies had provided for payment of a variable service charge and that this was still justified given the extent of the services it provided to the tenants in relation to operating their businesses and complying with all heath and safety requirements. It argued that tenants should not only bear the true operating costs but this would also incentivise them to help keep these costs down. It pointed out that the rents would be lower to reflect this liability and thatsteps were being taken to limit any liability for any future major structural works.
The annual running costs of the Market has been more than £4 million and these have been heavily subsidised by the City to the tune of about £1.5 million per year as, in recent years, the tenants have been paying only a fixed rent whilst major works were being undertaken. However, they were aware that the City intended to re-impose a variable rent when their tenancies were renewed.
The Court considered that the costs of repairing and maintaining the Market and providing the extensive services for the traders was for the joint benefit of the City as freeholder and the tenants as long term occupiers. It noted that tenants remained at the Market for long periods and that they were seeking new tenancies of 15 years.
The Court rejected the tenants’ criticism of the way in which the City had been managing the Market. It did not consider there were grounds for making the City bear the risks of future expenditure because of neglect or poor management of the Market or that service charges would be higher than comparable markets. It also held that there was nothing unusual or particularly burdensome in tenants having to plan and provide for uncertain costs and that, in fact, the costs would not be so uncertain as there would be budgets which would be discussed and set in advance.
The Court made it clear that any party seeking a change of terms on a lease renewal had to show good reason for it as the general rule was to seek to preserve the basis of the commercial arrangement originally agreed between the parties subject to reasonable updating. Given that most of the tenancies had originally been granted subject to variable service charges, and the tenants were not arguing about liability for future running costs but just wanted certainty, the Court held that a variable service charge was part of the original commercial arrangement and there was no good reason to change this.
The Court also thought a variable service charge was fair and reasonable as it could be structured so that tenants pay towards services they enjoyed and it noted that a sinking fund was to be set up to avoid tenants having to pay substantial sums unexpectedly. In relation to a few number of tenancies which were originally granted at a fully inclusive rent, the Court held there was good reason to impose a variable service charge on renewal so the position was uniform throughout the Market.