Covid-19 and interim rent

Our team: Armel Elaudais

While the full impact of the Covid-19 crisis on commercial rental levels is not yet known, landlords and tenants may be able to capitalise on the market fluctuations caused by the pandemic by making use of the interim rent mechanism under the Landlord & Tenant Act 1954 (the Act).

In broad terms, interim rent is the rent payable during the continuation of a protected tenancy until the commencement of the new lease. This will be payable from the earliest date that could have been specified in the tenant’s section 26 request or the landlord’s section 25 notice (the relevant date). This means that (a) interim rent is only payable if a section 26 request or section 25 notice has been served, (b) the date from which it is payable depends on the date of service of the actual request/notice so timing could be key. There is however no tactical advantage, when it comes to interim rent at least, in specifying a later date in the request or notice.

The default position is that interim rent will be the rent under the new tenancy. There are however some exceptions:

  1. Where the interim rent differs substantially from the new rent; or
  2. When the terms of the new tenancy differ from the old tenancy to such an extent that the interim rent is substantially different from the new rent.

What then amounts to a substantial difference? Unhelpfully, the Act does not provide any guidance but cases suggest that a 10% different will not be sufficient while 40% was considered substantial.

As discussed in another of our articles, the pandemic is having an impact on unopposed lease renewals so it is easy to see how these exceptions are likely to be pertinent:

  • Delays in determining the rent for the new lease may lead to arguments that the interim rent is substantially different from the new rent. Landlords may seek to argue this where the interim rent period started before the Covid-19 pandemic when rents were higher. Conversely tenants may rely on these provisions where the relevant date fell at the height of the crisis when businesses were forced to close.
  • If parties agree to introduce in the new lease new terms arising out of the pandemic that would not have applied before, again there may be arguments that this is having a substantial impact of the level of the new rent.

With the current economic uncertainties a number of tenants are reviewing their portfolios, particularly in the retail sector, and reconsidering whether to go through with lease renewals. Where this happens and the tenant does not renew its lease, the interim rent will be “the rent which it is reasonable for the tenant to pay” while its tenancy continued.

What is reasonable should be assessed in a practical and fair way, having regard to the actual circumstances contemplated at the beginning of the interim rent period. The interim rent will be based on a notional tenancy (similar to the principles used for rent reviews), assuming that it is a tenancy from year to year on the same terms as the old tenancy and having regards to the rent payable under the old lease. This cushioning method tends to produce lower rents, however, the Court have a wide discretion when it comes to deciding what is a reasonable rent.

Parties have six months from the termination of the old lease to apply to the Court for interim rent, so while things are still uncertain, it may be sensible to wait until the real impact of the Covid-19 crisis on rents is known, making sure that relevant valuation evidence is collected in the meantime.

This being said, tenants would be wise to consider serving a section 26 request as soon as possible in order to maximise any potential rent reduction. Landlords on the other hand might want to hold off serving a section 25 notice to have the benefit of a higher passing rent as long as possible.

View by date:

View by author:

Would you like to hear more?