Assessing rent in lease renewals under the Landlord and Tenant Act 1954

The last 18 months have undoubtedly been an unprecedented period of uncertainty for retail tenants. One of the conundrums facing landlord and tenant alike has focused on the question of how rent should be assessed when a tenant renews its lease under the provisions of the Landlord and Tenant Act 1954 (“the Act”). Turnover rents are becoming a more common topic of conversation between landlords and tenants as tenants seek to balance the risk in relation to rental liability in these uncertain times and as landlords seek to benefit from successful tenants’ upturn in sales.

But can a landlord demand that a tenant pay a turnover rent when that tenant comes to renew its lease under the Act?

This question which considered by Nottingham County Court in the case of “W (No.3) GP (Nominee A) Ltd & W (No.3) GP (Nominee B) Ltd v J D Sports Fashion PLC”, who gave judgment in the case in October last year. The long-awaited transcript of that judgment has now been made available.

The case concerned the renewal of JD Sport’s lease in the Derbion Centre in Derby. That company was already paying a turnover rent of 8% on gross sales and at the time the hearing took place, an annual base rate of £205,723.

Interestingly, the parties effectively swapped their positions on the question of whether the new rent should include a turnover element. The landlord’s initial proposal (set out in the section 25 notice served on the tenant) offered a fixed rent and the defendant’s response (once proceedings had been issued) proposed a rent with a turnover element. By the date of the trial, the parties’ positions had reversed with the landlord seeking a turnover rent and the tenant, an annual fixed rent of £17,700.

What did the court decide?

The court took the view that it could not impose a turnover rent in the terms the landlord had proposed. The inclusion of a turnover rent would sit uneasily with the provisions in the Act under which rent is calculated and was found to be “inconsistent with the objective of the Act, namely that a tenant should be entitled to renew its lease at market value”. It ordered an annual fixed rent of £104,300, considerably less than the previous rent paid and without the turnover element present in the earlier lease.

What does this mean for retail tenants?

Nick Martyn, Dispute Resolution Partner, RWK Goodman comments, “To some extent, it strengthens their hand should they wish to avoid the inclusion of a turnover rent in any lease renewal under the Act. Although the judgment is a county court decision and arguably fact sensitive. But there are other takeaways from the decision which do have practical relevance to tenants operating in the retail and commercial space. The case highlights the opportunity for tenants in the current market to seek a reduction in the rent payable under their tenancy. In this case, the reduction was substantial. It also underlines the court’s view that tenants are in a strong bargaining position in the current market, providing tenants with opportunities to reduce their rental costs as the country moves forward from the lockdown interruption caused by the Covid-19 pandemic. The case also exemplifies the importance during litigation of securing sound and impartial valuation advice; something for tenants to consider if they find themselves in the middle of court proceedings arising as a result of the lease renewal process”.

It remains to be seen whether this case will be appealed and the weight that courts attach to the judgment going forward. However, it provides a useful marker for tenants to use in their negotiations when they renew and in the steps they seek to take to reduce their rental liabilities.