Newsletter December 2013: With over 40% of retail units in England & Wales expected to be subject to lease renewal over the next two years, the tactics employed and the calculation of interim rent will come into sharp focus.
Following the amendments to the Landlord and Tenant Act 1954 (“the Act”), made by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, there is a general presumption that the interim rent will be at the same level as the rent under the new lease. However, it is Gilbert Evans’ view that there will still be situations where challenging this presumption will pay dividends.
It is often considered that the introduction of the 2003 regulations has eliminated the need for tactical considerations to play a part in negotiations on the correct level of interim rent. Whilst certain strategies relating to timing have fallen away, we are always mindful that there still remain two possible valuation approaches and that the former ‘old’ approach of valuing on a year to year tenancy can still apply.
Under section 24C of the Act the general rule is that the interim rent will be at the same level as the rent payable under the new tenancy unless there are material changes in value. Such changes may arise under two circumstances. Where either the terms of the new lease proposed are significantly different to that which existed previously or where market conditions dictate that the value of the property at the ‘appropriate date’ is substantially different to the value when the new lease eventually becomes effective i.e. between the respective valuation dates.
Section 24D of the Act applies where:
- A landlord initially opposes the lease renewal
- A tenant serves a discontinuance notice, or the tenant vacates before taking up the new tenancy
- If the renewal lease is not of the whole of the premises comprised in the previous lease
In such cases, the interim rent is that which it is reasonable for the tenant to pay whilst the tenancy continues having regard to the rent payable under the terms of the old tenancy (and, if relevant, the rent payable under any subtenancy of part). In such instances, the ‘old’ method of assessing an interim rent will be adopted – incorporating a “cushioning” effect to the rental figure assuming:
- A tenancy from year to year
- The valuation criteria set out in section 34
Unless there are exceptional background circumstances, the tenant will benefit from the ‘cushioning’ effect which the ‘year to year’ assumption implies. It is common practice for a deduction of at least 10% to be made for the yearly tenancy assumption but in appropriate cases discounts significantly in excess of this can be made.
Therefore it is our view that the general presumption in respect of the calculation interim rents needs to be carefully considered to establish whether there is scope for a deduction as a consequence of the circumstances outlined above.
There are clear cost benefits to be secured from identifying the right valuation approach. For insightful advice, call David Gilbert.