The Central London County Court has considered the rent payable on a lease renewal of a ground-floor pharmacy unit at Old Street, EC1, in Old Street Retail Trustee (Jersey) 1 Ltd and another v GB Healthcare Ltd Case No G02CL960, in a decision which will be of interest to all involved in commercial property in the current economic climate.
The terms of the new lease were agreed save for the rent payable from 19 August 2020: the interim rent would be the same as the new rent. Section 34 of the Landlord and Tenant Act 1954 provides that the rent shall be the sum at which, having regard to the terms of the tenancy, the holding might reasonably be expected to be let in the open market by a willing lessor disregarding any effect of the occupation by the tenant or its predecessors, any goodwill attributable to the business and any effect on rent of improvements.
It was agreed that there were no improvements and that the appropriate valuation method was the comparable method based on zoning, which requires the floor area to be divided into zones A-D, each with a standard depth of 20ft. Zone A at the front of the premises is the most valuable, Zone B is worth half of Zone A, Zone C is worth half of Zone B and Zone D is an eighth of Zone A. The remainder of the premises is considered at a single rate relative to Zone A. The individual areas of each zone added together form the net internal area.
The passing rent, fixed on review in March 2015 was £40,250. The landlord contended for a rent of £148,000, the tenant for £45,000. The court determined the rent at £112,000 through the following analysis:
• Comparables: the most reliable comparable evidence came from the parade of which the unit formed part. The court accepted that it was appropriate to rely on the evidence of open-market lettings in the parade to Marks & Spencer and Aldi, even though they were food stores. Based on the comparable properties, the Zone A rent was £192 per sq ft.
• Rent-free period: while the agreed draft lease made no provision for a rent-free period, it is usual, when shop units are let in the open market, to allow a rent-free period to reflect a fitting-out period and as an incentive. The judge considered that the correct approach was to analyse the comparables to assess what rent would have been paid if no rent-free period had been allowed, and to adjust the rent and interim rent payable accordingly.
• Exclusivity: there was to be no adjustment for the landlord’s agreement that the tenant would be the only pharmacy in the parade. The tenant, for the purposes of valuing the rent under section 34, is a hypothetical tenant.
• Reduction: it was agreed that the rent should be reduced to reflect the economic effects of coronavirus and the significant worsening of the economy. The court decided that a reduction of 25% – from £192 per sq ft to £144 per sq ft – was appropriate. This produced a figure which was rounded down to £112,000.
Louise Clark is a property law consultant and mediator
