Valuation in business tenancy renewals: don’t assume a rent-free period

When deciding the new rent payable in a business tenancy renewal, the courts have tended to factor in a rent-free fitting-out period or inducement, leading to a lower overall rent. That trend may now be reversed. 

The County Court's judgment in the case of HPUT v Boots UK Limited, handed down in Spring 2021, which has now been published , was the first of 123 claims between the landlord HPUT and the tenant Boots. These were all unopposed lease renewal claims under the Landlord and Tenant Act 1954 (LTA 1954).

The impact of the pandemic  

There were some significant wins for Boots, notably the grant of a five-year tenancy, as Boots wanted, despite the former tenancy having a 15-year term. Boots also successfully argued for a break right at year three, arguing that they needed this flexibility in the current climate of uncertainty.

In a nod to the impact of the pandemic and economic challenges, His Honour Judge Dight said "it is apparent to me that the essence of the evidence is that shorter leases have become much more the flavour of the market, reflecting the additional degree of flexibility that the Tenant asked for and needs in light of the uncertainties created by the economic circumstances in which the market finds itself".

However on the matter of rent, of particular note to valuers was the judge's  decision in relation to whether there should be an assumption of a rent-free fitting-out period when calculating the new rent payable under the new lease. The answer – no – will be welcomed by landlords.

No assumption of a rent-free period

Under section 34 LTA 1954, the rent payable under a tenancy granted by the court is that at which, "having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing tenant". 

The "hypothetical tenant" is generally assumed to require a rent-free period in which to fit the premises out, thereby reducing the rent payable from day one of the new lease. There is no binding legal authority on this point but it is the clear trend in County Court cases. Boots, therefore, argued for a lower rent, based on the assumption (as in the market for new lettings) that any hypothetical bidder would require a rent-free period. 

However, the reality of this case was that Boots themselves would not need a period to refit their premises. Boots were already in the premises, holding over. On that basis, the landlord HPUT said the court should have regard to the "principle of reality" and not make assumptions which are contrary to the known facts.

Finding in favour of HPUT, the judge held that section 34 LTA 1954 determined the rent payable from day one of the new lease and that there was no express wording in the legislation to say that a rent-free period should be assumed. None of the disregards to section 34 applied.

The judge emphasised the word "reasonably" in section 34 as meaning that the reality of Boots' situation must be taken into account: "Standing back, in the market the requirement for some sort of inducement to the tenant to take the lease depends on all the circumstances…The reality here is that the tenant does not need an inducement in this case and specifically does not need a rent-free period…it would be illogical for one to be built into the calculation".

Osborne Clarke comment

Although not a decision that will bind other courts, Judge Dight's ruling is potentially important and provides landlords and valuers with an important reference point in negotiations, even though each case will depend on its very specific facts.