Rent-free on renewal: will the latest decision finally put the matter to bed?

Determining the correct rate of rent in a 1954 Act renewal can be a sticky subject at the best of times, not least when a rent-free period is thrown into the mix, says Kirsty Black.

Section 34 of the Act allows the Court to determine the level of rent due under the new lease, taking into account comparable evidence and applying certain disregards. 

Whilst s.34(1)(a) requires the Court to disregard “any effect on rent” of the fact that the tenant has been in occupation, it does not specifically mention any incentives that would be granted to the hypothetical tenant to take the lease, or any rent-free periods permitted for initial fitting out works

Because the protected tenant will almost always remain in occupation of the property when its old tenancy ends and the new one begins, the full level of rent which has been determined by the Court will be payable from the start of the term of the new lease. 

There is no binding authority as to whether that full headline rent should be reduced to take into account rent-free periods granted in comparable leases, either for fitting out new premises or those granted as incentives. However, several County Court decisions have considered the matter, with some deciding and some refusing to grant these reductions on renewal.  

One of the more recent decisions that dealt with the issue again was the case of HPUT Trustee No1 v Boots UK Limited - heard in May 2021. 

Like many rent review cases, the decision was made to reflect the presumption of reality, rather than following what - the tenant would argue - reflects the language of the Act – i.e., that the (new, incoming) hypothetical tenant would need a period for fitting out and in light of this would require a rent-free period, which should therefore be taken into account. 

Instead, this case held that because there was in fact no rent-free period in the new lease, the full s.34 rent that had been determined was payable from day one, without any discount.

Just before Christmas 2022, however, the question arose again in Old Street Retail Trustee (Jersey) 1 Limited v GB Healthcare Limited. As is often the case, the terms of a renewal lease had been agreed, but not the rent and interim rent - although it was agreed that the level of these rents should be the same. Five issues were presented for determination, including whether the rent assessed under s.34 should be reduced to reflect the absence of a fitting out rent-free period.

HHJ Roberts confirmed - disagreeing with Boots, but in line with five other County Court decisions - that “the correct approach was to analyse the comparables to assess what rent would have been paid for them if no rent-free period had been allowed, and then to use that to determine the s.34 rent for the subject unit”. He also noted that it was “not of no significance” that this was the approach both experts had initially taken, before being instructed that this was a matter of law not valuation. 

This meant that by taking into account the whole of the rent-free period, the Court would be “putting the parties in exactly the same position as they would be in if the new lease was being agreed in the real world”. The assumptions in s.34 are meant to replicate the real market value of the letting, and so it seems logical to adjust the determined rent over the term of the lease to reflect the reality, where all but one of the relevant comparables included rent-free periods. 

In practical terms, this meant that the full rent-free period - here, three months for fitting out and a further three months as an incentive - was deducted from the headline rent in order to arrive at a net effective rent. 

Comment

A significant rent-free period – in this case being six months in total – can inevitably make an important difference to the level of rent for both parties. It is therefore of no surprise how often this issue is coming before the court. 

The uncertainty, with the lack of binding authority and the differing County Court decisions, inevitably makes coming to an agreement on the level of rent more difficult, with both parties believing their position is correct. Tenants will hope that this latest decision, with HHJ Roberts expressly disagreeing with the decision of HHJ Dight in the Boots case, might settle the matter. However, it is, of course, yet another County Court decision and therefore of no binding effect. Until the issue is determined by the Court of Appeal, it’s likely that parties will continue to debate the point.

Kirsty Black is a Shoosmiths partner and real estate disputes specialist.