The court must determine the terms of a new business tenancy under section 35 of the Landlord and Tenant Act 1954 before determining the rent payable by the tenant, because the terms will have an impact on the market rent to be ascertained under section 34.
So, having decided on the terms to be included in the tenant’s new lease of retail premises at the Westfield London shopping centre in Shepherd’s Bush, the county court judge in WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellschaft mbH [Winchester County Court, 25 March 2021] moved on to consider the question of the rent.
One of the first issues that the judge had to address was how to value the rent payable for premises in a fragile retail market, which was suffering from an acute crisis of confidence. And he drew on Telereal Trillium v Hewitt [2019] UKSC 23; [2019] PLSCS 90, a decision of the Supreme Court in a rating case, in order to help him do so – deciding that he must assume the existence of a willing tenant that was sufficiently interested to enter into negotiations and to agree a rent for the premises, and that he should assess the rent by reference to evidence of general demand derived from other comparable properties, making any adjustments that were necessary.
The passing rent under the tenant’s existing lease was £953,000 pa, based on a Zone A rate of £327.50 per sq ft, set by an arbitrator on rent review in 2013. But the tenant argued that there was an imbalance between supply and demand, caused by the opening of an extension to Westfield in March 2018, which was then exacerbated by a growth in online sales and the decline in the rental market, and was further aggravated by the effects of the coronavirus pandemic. Consequently, several units were vacant, tenants were unwilling to commit, and those who were willing to do so were entering into short-term leases, or leases with turnover rents.
But the judge did not believe that the pandemic would last forever. Thanks to the availability of vaccines, infection rates and hospital admissions are falling, and economists are even suggesting that there may be a post-Covid boom, on the back of people’s desire for normality and the money saved during lockdown. Consequently, the judge believed that the prospects for the future were likely to improve, even if the long-term decline of the retail sector is not reversed.
The rents proposed by the landlord and tenant differed hugely. Therefore, the judge turned to what he considered to be the strongest comparable evidence of the appropriate rent for the premises – which was a letting in April 2020, at £255.29 per sq ft Zone A, agreed towards the bottom of the market and devalued for three months’ rent-free fit-out, to which the judge applied discounts of 10%, 24% and 20% respectively in order to allow for the size and location of the premises and the effect of the pandemic – resulting in a rent of £404,666 pa (and, because the retail market had been much firmer, an interim rent of £758,785 pa).
Interestingly, the judge initially thought that the inclusion of a pandemic rent suspension clause might increase the rent payable, but changed his mind. In his view, the omission of a pandemic clause would cause the tenant to discount its rental bid. However, because the market is already factoring in such clauses, its inclusion would have no effect whatever on the tenant’s rental bid.
Allyson Colby, property law consultant
