On the Fourth Day of Christmas 2022...
...Today Stacey Moore from Irwin Mitchell’s Real Estate Disputes team examines the topic of post-pandemic lease renewals.
The 2021 case of HPUT Trustees No 1 Limited, HPUT Trustees No 1 Limited v Boots UK Limited (details of which were published in 2022) is a good recent guide to how lease renewals are determined under the Landlord and Tenant Act 1954 (the “Act”) when the parties cannot agree on the terms.
Factual Background
The landlords, HPUT Trustees No 1 Limited and HPUT Trustees No 1 Limited, had Boots UK Limited as tenant in a number of their properties where the leases were being renewed under the Act. This case relates to premises in Bridlington where the parties could not agree on the following main terms for the proposed lease:
- Duration: The landlord wanted a 10 year term whereas the tenant wanted a 5 year term.
- Inclusion of a break option: The tenant wanted a break option at the end of year 3, which the landlord refused.
- Rent increase/rent review: The landlord argued for a fixed annual increase of 1.5%. The tenant rejected the proposal for a fixed annual increase both on the basis that a fixed increase was not appropriate and because it was not necessary if a 5 year term was agreed or ordered.
- Rent: The tenant wanted a rent-free period to be assumed for fit-out works.
It is worth noting that the existing lease was for a term of 15 years with a stepped annual rent increase of 1.5% and gave the tenant an annual option to break.
Decision
The tenant was awarded a 5 year term with a break option at the end of year 3. The court recognised that the current market uncertainty meant that the tenants required flexibility with shorter leases being more common (even prior to the pandemic Boots’ standard request in a lease renewal was for a term of 3 years with an annual breaks option). The court concluded that a degree of reasonableness in all circumstances was required. The court needed to look at the current market (with the present economic uncertainty) and the need for the tenant to have a degree of flexibility to remain nimble enough to make quick or sudden changes but also taking the security of the landlord into consideration.
The court took into consideration that, by suggesting a break option at the end of year 3, the tenant would be in a worse position than under its current lease which had an annual break option.
In relation to the stepped rental increase, the court came to the conclusion that there should be no fixed stepped increase, nor should there be a rent review provision in a lease for a 5 year term.
The decision was not all in the tenant’s favour. The court departed from recent non-binding county court decisions and did not award a rent-free period to the tenant based on an assumed fitting-out period. The court found that the rent determined under section 34 (1) of the Act was payable from day 1 and that there was nothing in section 34(1) which specifically requires the hypothetical model to include the assumption of a rent-free period. The reasonableness required in deciding whether to factor in a rent-free fitting-out period must take into consideration all of the circumstances and, in this situation, the tenant was unlikely to need a rent-free period to enable it to fit out premises that it already occupied.
Key points
The court will look at whether the terms in dispute would be a deviation from the current lease whilst looking at giving the tenant the appropriate flexibility in the current market as well as giving the landlord sufficient security.
Landlords are now more likely to argue that a court does not have to assume a rent-free fitting-out period when deciding on the rent in a lease renewal.
The decision is not binding but is good guidance for parties in relation to retail lease renewal negotiations in the current market.
