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May 2014 Lease renewal – Tenant loses argument over lease term

In disputes over the length of the new lease in a 1954 Act lease renewal, historically the Courts have tended to grant the tenant their requested length of term. However, a surprise decision in a recent case (Iceland Foods Ltd v Castlebrook Holdings [2014]) has bucked that trend and imposed a longer lease.

The judge was asked to determine the duration of a renewal lease of town centre supermarket premises in Sandbach, Cheshire, as well as the level of rent.

The tenant, Iceland, had been in occupation for 20 years of a lease which was originally granted for a term of 42 years. Iceland served a Section 26 Notice, requesting a tenancy of five years at a rent of £37,500 per annum. The landlord, Castlebrook,requested a term of 15 years at a rent of £182,350 per annum. The judge had to decide what was reasonable.

In accordance with Section 33 of the Act, the judge could only order either a periodic tenancy or a tenancy for a maximum of 15 years. Subject tothat limitation, the judge had to decide a length of term which was “reasonable in all the circumstances”.

Iceland sought a shorter term on the basis that it wanted flexibility in light of the store’s under-performance and the fact that market conditions were unsettled. The landlord argued that a shorter term would affect the value of its reversion and that supermarket leases were usually granted for a longer term.

The judge exercised his discretion and granted Iceland a term of 10 years, double the length requested by the tenant. The judge gave consideration to Iceland’s requirement for a security of tenure, as this was the primary purpose of the Act. However, the judge struck a balance between this and the landlord’s requirement that the term was not so short as to prejudice the value of the reversion.

The court considered that the length of the existing lease (42 years) was a factor in granting a longer lease than that requested by Iceland. The judge gave limited consideration to market comparables when deciding the length of the new lease.

In contrast, Section 34(1) of the Act does refer to market conditions when assessing rent. The judge considered expert evidence on the rental value of the property and ordered a rent of £63,000 per annum subject to review after five years.

While this decision seems to offer hope to landlords who are seeking a longer term, as a County Court decision it will not carry as much weight as a decision made in a higher court. However, it is a reminderof the factors the court will take into account when deciding the term of a renewal lease.

Tenants should be wary of from relying completely on internal policies as the Courts are only concerned with what is fair between the parties and will consider each case on its own merits. Courts will no longer refrain from ordering tenants to take longer terms than they request, but they will consider local market trends to decide rental values.

I reality few lease renewal cases go to Court – and if a tenant is not happy with renewal terms awarded by the Court they can walk away. Nonetheless this decision is on the face of it contrary to the commonly held view that the Courts would grant a tenant a the term that they want.

At Johnson Tucker we believe that we are able to get the best results for our clients through a proper understanding of the market combined being fully conversant with the legal framework and up to date case law.