How Has The Pandemic Impacted Rent Assessment In Lease Renewals?

The case of S Franses Ltd v Cavendish Hotel provides an interesting insight into the assessment of rent and interim rent for a new commercial lease under the Landlord and Tenant Act 1954 (the Act) in light of the impact of Covid-19 on the rental market.

S Franses Ltd v Cavendish Hotel

Background

The business Tenant (S Franses Ltd) involved in this dispute is a textile dealership, which was founded and first began trading back in 2015. The Tenant held two leases for 80 Jermyn Street, London SW1, which is a street well regarded for its rich history as a hub for traditional menswear and niche retail businesses. Additionally, the street is also part of the St James’ art district, which, as a result, means that the commercial premises have special planning policy protections which are designed to retain and enhance the unique character of the area.

The two leases in question were due to expire on 2^nd January 2016 and the Tenant sought to renew both of them under the Act. However, the Landlord opposed the renewal of both leases on the redevelopment ground (set out in Section 30(1) (f) of the Act and referred to as “ground (f)”).

In 2018, the Supreme Court rejected the Landlord’s opposition and ruled that the Tenant was entitled to renew both leases, which has led to the recent proceedings in respect of the terms of those renewal leases.

Whilst the vast majority of the lease terms had been agreed between the two parties, a number of terms still remained outstanding, which included the appropriate level of rent and interim rent. This was complicated due to the impact of the pandemic on the rental market and the lack of comparables.

When the proceedings came back before the County Court, it was at a time when the West End and Jermyn Street property markets had been significantly impacted by the pandemic with rental values falling. Additionally, in the retail sector, there had also been a move away from the traditional zoning valuation procedure in favour of turnover rents.

Both the Tenant and Landlord relied upon expert valuation evidence as to the appropriate rent to be paid with both valuations being quite wide apart. The Tenant’s expert considered that a renewal rent should be £96,500 per annum, whilst the Landlord’s expert valued that the renewal figure at £174,750. Both amounts were significantly lower than the passing rent amount of £220,000 per annum under the existing lease.

What did the High Court decide?

The High Court was extremely critical of the two valuations and commented that there was an “unhelpfully partisan approach taken by the experts“. However, the Court did recognise that both expert valuations had to deal with how to consider a Covid-19 impacted rent assessment when there was a lack of comparables.

The Judge gave greater significance to the pandemic and relied on a traditional rent zoning methodology, ruling that the rent should be set at a reduced Zone A rate from a single market transaction, which reflected recent post-Covid comparable evidence (the renewal of a lease on a shop at 95 Jermyn Street in September 2020). This amount was £102,000 per annum, which was more than half the passing rent under the previous leases.

With regards to interim rent, typically this amount is usually set at the same as under the renewal lease (pursuant to Section 24C of the Act). However, in this case, Section 24D of the Act applied instead as the Landlord had opposed the Tenant’s lease renewal in 2015. Section 24D states that there is no typical assumption that the interim rent will be the same as the rent amount under the lease renewal and will instead be assessed based on what a tenant would pay on a lease from “year to year”.

When considering what the interim rent should be set at, the Judge considered both the passing rent under the previous lease terms (£220,000 per annum) and the new rent of £102,000 per year. The Judge deemed the passing rent under the old lease to be too high but the new rent amount to be too low and ultimately deemed that the interim rent amount should be set at £160,000 per year.

Comment

The ruling in the case of S Franses Ltd v Cavendish Hotel provides some helpful guidance to business tenants and landlords in respect of the likely route the Court’s will take to lease renewals under the Act, and the significant impact that the pandemic has had on the retail sector. Evidence submitted during the case showed that 11 of the 57 commercial premises on Jermyn Street were vacant at the time of the proceedings, which obviously contributed to the significant reduction in rent for the lease renewal.

This case also highlights that when it comes to interim rent that there is no presumption that it should reflect the new rent amount under the lease renewal, instead it should be set at what it is ‘reasonable for the tenant to pay’.