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Rent free on renewal: hypothetical model vs reality

While most unopposed lease renewals under the Landlord & Tenant Act 1954 are resolved by the parties reaching agreement on the terms of the new lease, the uncertainties brought on by the Covid pandemic seems to have made parties less willing to compromise leading to a number of decisions over the past few months.

The latest decision to be published (although the case was originally decided in May 2021) was in the case of HPUT Trustee No 1 Limited & HPUT Trustee No 2 Limited v Boots UK Limited.

The parties had agreed to the form of lease save for the following issues:

1. The duration of the new lease,
2. Whether it should include tenant breaks,
3. Whether there should be stepped rent increases, and
4. The rent payable under the new lease.

Recognising that the market remained uncertain (the case was heard before Covid restrictions had been lifted), the Court sought to balance the tenant’s need for flexibility with the landlord’s requirement for certainty. It therefore ordered a term of 5 years (the landlord wanted 10 and the tenant 3) subject to a tenant break after 3 years (rather than the annual breaks enjoyed by the tenant in the previous lease).

The Court declined to include fixed rent increases, commenting that if such increases had been included in the previous lease it was because of the specific sale and leaseback arrangements between the parties at the time and was therefore not warranted on renewal under the 1954 Act. The Court added that as the term was only for 5 years, rather than 10, there should not be a rent review either.

The most interesting part of the decision though is in relation to the rent and in particular whether the Court should allow a rent-free period for fitting-out. In recent years, the Courts had tended to assume that the tenant should be entitled to a rent-free period, on the basis that the hypothetical tenant would have the benefit of a rent-free to fit out the premises and that the actual tenant would otherwise be penalised because it was already in occupation. While Judge Dight acknowledged these authorities, he pointed out that he was not bound by them and should have regards to the reality that Boots did not need to refit the premises as it was not a new tenant. He therefore concluded that there should be no rent-free discount.

As with the other decisions referred to in this case, this is only a County Court decision and therefore not binding. But comforted by this decision, landlords may be more minded to challenge the tenant’s arguments for a rent-free on renewal.

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