Unopposed renewal business tenancy cases to learn from

 

It appears that unopposed lease renewal cases under the Landlord and Tenant Act 1954 are like buses; there is a dearth and then 3 come along in a row.

The 3 cases are very different to the other but each provides valuable insight as to what happens if a case does reach Court. Of course, about 99.99% of such cases settle before Court or are determined by Arbitration under the PACT Scheme.

Each case contains some interesting comment about the expert valuation evidence as referred to below.

The 3 cases, in chronological order are as follows:

Britel Fund Trustees Limited v B&Q Plc (11 March 2016)

The relevant factual details and Court’s decision

  • Property: 37,000 square feet B&Q retail warehouse at Unit 10 Tottenham Hale Retail Park, Tottenham.
  • Passing rent: £776,139 per annum (£20 psf).
  • Agreed terms: 10 years, with mutual rolling break from 30 June 2018.
  • Proposed rent: £698,500 by Landlord and £281,000 by tenant.
  • Rent and Interim Rent determined by Court: £373,000 per annum (£10.10 psf).
  • 3 months rent free allowance for fitting out.

The basis for Court’s findings

  • a) The break clause affects the identity of the likely hypothetical tenant. No DIY retailer would take a short lease given the substantial investment (over £2 million) required in fitting out the property. Only a discount retailer would do so.
  • b) Given the landlord has redevelopment plans, it is to be assumed the break clause is likely to be operated in 2.5 years and this merits a 25% rental discount for a DIY retailer(after taking account of the statutory compensation of £775,000 that would be payable to the tenant) and a 20% rental discount for a discount retailer (given it has lesser fitting out costs).
  • c) Having examined the previous conflicting case authorities, it was held that you have to envisage the property as empty and free from tenant’s fixtures; so a rent free fitting out period is appropriate if such rent free periods are generally available in the market on new lettings. In this case, 3 months rent free (i.e. a 2.5% discount) was apposite.
  • d) The major factors to consider when comparing comparable properties are:
    1. Location- out of London comparables were held irrelevant and it was held that the Retail Park had a smaller catchment area than the area where the London comparables relied on are;
    2. The level of demand for such premises- this was held to be limited and the Judge held rents for DIY premises had not increased since 2007/8;
    3. Service charge level- there was a high level at the Tottenham Hale Retail Park which justified a 0.75% rental discount;
    4. Planning permission and user clause;
    5. Car parking – there is 1 space per 453 square feet at the Retail Park as compared to the normal standard of 1 space per 225/250 square feet.;
    6. Service yard and loading facilities- there is no dedicated service yard or turning circle at the Retail Park.
    7. The basis their rents were fixed- open market lettings being the best evidence available (rather than agreed or determined rent reviews).
  • e) The evidence of both experts was not truly independent and impartial and, in their own way, the experts were as much advocates for their client’s causes as their Counsel was. “For both experts their favourite geese are swans and their opponents’ swans, ducks”.

Flanders Community Centre v London Borough Of Newham (8 April 2016)

The relevant factual details and Court’s decision

  • Property: Community centre at Napier Road, East Ham, London;
  • Passing rent: £1 per annum (as original let in poor condition with tenant liable to put in repair);
  • Agreed terms: 10 years on same terms as old lease (where applicable);
  • Proposed rent: £23,000 per annum by the landlord; £1 per annum by tenant;
  • Rent and Interim Rent determined by the Court and Court of Appeal: £1 per annum.

The basis for Court’s findings

  • This was not really a commercial letting. The property could only be used by the Flanders Road Community Association for their Association’s purposes and such use was strictly controlled and restricted by the Local Authority landlord.
  • There were no real comparables with both parties’ experts putting forward evidence that was not comparable or applicable or irrelevant. In particular, the landlord’s expert relied on lettings of other community centres without knowledge as to their lease restrictions.
  • In the absence of any reliable expert evidence, the Court could have regard to the passing rent and should not set about determining any other rent without the evidence to do so.

National Car Parks Limited v Hawksworth Securities Plc (12 May 2016)

The relevant factual details and Court’s decision

  • Property: 2 car parks in North Westgate, Peterborough
  • Passing rent: Base rents £45,940.82 per annum for Car Park 1 and £45,311.89 for Car Park 2, with turnover rents of 60% on receipts above £104,622 and £88,839 respectively.
  • Agreed terms: 5 years with same rental structure as before and with a landlord’s break right. Court determined the start date should be 25 December 2014 (rather than the normal 3 months and 21 days after the Judgment) as the parties had agreed and were bound by this date. And the Court fixed a break date of 1 November 2017 given the uncertainty of the landlord’s plans at present.
  • Proposed rents: £60,000 and £69,000 per annum for Car parks 1 and 2 by the tenant;£100,000 and £82,500 by the landlord;
  • Rent and Interim Rent: Court decided annual rents should be £88,000 and 77,000 plus 60% of turnover above £158,000 and £131,500 respectively.

Basis for Court’s findings

  • The conventional method for valuing car parks is on a profits basis.
  • The break clause caused a 10% rental discount.
  • 1954 Act protection was worth a 10% rental uplift over an unprotected tenancy.
  • 2 other car park operators had tendered for lettings of Car Parks 1 and 2  and 4 other sites owned by the landlord and RCP had then entered into an agreement for lease of all 6 sites (conditional on NCP vacating these 2- which they did not). The amount RCP was prepared to pay was the best evidence available. However, their rents of £80,000 and £70,000 needed a 10% uplift as they were based on unprotected tenancies.
  • It could order a turnover rent but this should remain at 60%.
  • Landlord’s expert lacked some independence as had acted for landlord in negotiations for the letting of these Car Parks and their 4 other sites.

Conclusion

In the NCP case, the Judge stated that “It is very unfortunate that this expensive litigation has not been settled at an earlier stage , as are nearly all applications of a similar nature”.  But, for practitioners, these cases are a blessing, shedding real insight into how the Court actually deals with lease renewals and, thereby, helping parties to better settle their cases. They also highlight the real need for cogent and independent expert valuation evidence.

Jonathan Ross
Forsters LLP