Rent and duration

Introduction

Section 33 - Duration of new tenancy.

Section 33 is the following terms:

"Where on an application under this Part of this Act the court makes an order for the grant of a new tenancy, the new tenancy shall be such tenancy as may be agreed between the landlord and the tenant, or, in default of such an agreement, shall be such a tenancy as may be determined by the court to be reasonable in all the circumstances, being, if it is a tenancy for a term of years certain, a tenancy for a term not exceeding fifteen years, and shall begin on the coming to an end of the current tenancy.

As highlighted, the maximum length that the court can order is 15 years.

Section 34 - rent

Section 34 is the key provision which governs how the court will determine the rent under a new tenancy:

(1) The rent payable under a tenancy granted by order of the court under this Part of this Act shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the court to be that at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing lessor, there being disregarded—

(a) any effect on rent of the fact that the tenant has or his predecessors in title have been in occupation of the holding,

(b) any goodwill attached to the holding by reason of the carrying on thereat of the business of the tenant (whether by him or by a predecessor of his in that business),

(c) any effect on rent of an improvement to which this paragraph applies,

(d) in the case of a holding comprising licensed premises, any addition to its value attributable to the licence, if it appears to the court that having regard to the terms of the current tenancy and any other relevant circumstances the benefit of the licence belongs to the tenant.

(2) Paragraph (c) of the foregoing subsection applies to any improvement carried out by a person who at the time it was carried out was the tenant, but only if it was carried out otherwise than in pursuance of an obligation to his immediate landlord and either it was carried out during the current tenancy or the following conditions are satisfied, that is to say,—

(a) that it was completed not more than twenty-one years before the application for the new tenancy was made; and

(b) that the holding or any part of it affected by the improvement has at all times since the completion of the improvement been comprised in tenancies of the description specified in section 23(1) of this Act; and

(c) that at the termination of each of those tenancies the tenant did not quit.

(3) Where the rent is determined by the court the court may, if it thinks fit, further determine that the terms of the tenancy shall include such provision for varying the rent as may be specified in the determination.

(4) It is hereby declared that the matters which are to be taken into account by the court in determining the rent include any effect on rent of the operation of the provisions of the Landlord and Tenant (Covenants) Act 1995.

Effect of Electronic Communication Code

Rent and term

Vodafone Ltd v Hanover Capital Ltd

[2020] EW Misc 18 (CC) 

Summary

This decision clarifies the influence of the Electronic Communications Code 2017 (the Code) on valuation under s34 of the Landlord and Tenant Act 1954.

Facts

The case concerned the renewal of a 5-year business tenancy granted to Vodafone in 2008 of a mast-site in Manchester. The lease was a subsisting agreement under Schedule 2 to the Digital Economy Act 2017, which meant it fell to be renewed under Part 2 of the 1954 Act.

The lease expired in 2013 but Vodafone’s statutory tenancy continued pursuant to the 1954 Act. A notice under s25 of the Act was served on Vodafone, stating that the landlord would not oppose a new tenancy.

The parties were unable to agree the rent, lease length and whether there should be a break clause. Vodafone commenced proceedings in Manchester County Court, which were subsequently referred to the Upper Tribunal.

Issues

The issues to be decided were:

  • The length of new term to be granted and whether there was to be a break right (and if so on what terms); and
  • Rent for the new lease.

Decision

Lease length and break right.

  • Vodafone sought a three-year term and a six-month rolling break clause;
  • The landlord, Hanover, argued for a ten-year term with a five-year break clause.

Section 33 of the 1954 Act states that, in default of agreement, the lease length will be:

 “as may be determined by the court to be reasonable in all the circumstances”.

Sitting in the Upper Tribunal, as a judge of the county court, Martin Rodger confirmed that the court must:

“seek to balance the degree of protection to which the tenant is entitled in the interests of its business and the need to ensure that the decision is neither unfair on nor oppressive to the landlord”.

In order to strike the appropriate balance between Vodafone’s commercial needs and the landlord’s interest the appropriate term length was ten years with a six-month rolling break, exercisable after five years. The court noted that a minimum certain term length of five years was common practice in the industry but added that the:

“length of term likely to be granted in the open market is of only limited assistance in determining what is reasonable”.

Rent

Section 34 of the 1954 Act provides that, in default of agreement, the rent:

“may be determined by the court to be that at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing lessor, [subject to certain disregards]”

 As the court pointed out:

“This exercise involves the familiar valuation technique of imagining a negotiation between two parties, a “hypothetical landlord” and a “hypothetical tenant”, who are willing to enter into a tenancy of the Site on the terms which have now been settled.”

The question for the court was how to operate the hypothetical transaction under s34 of the 1954 Act in light of the Code. In particular, what regard is to be had to the parties’ awareness of the tenant’s possible rights under Part 4 of the Code to secure a code agreement in the absence of consent? 

It was common ground that the parties to the hypothetical negotiation would have regard to the Code, but:

  • Vodafone argued that the court should have regard solely to transactions which were carried out consensually based upon an awareness of the Code and the ‘no network’ assumption at paragraph 24 of the Code;
  • The landlord contended that valuation should be based upon transactions concluded since the reforms to the Code, which took into account the value to operator and so were not negotiated on the basis of the ‘no network’ assumption.

The court determined a rent of £5,750, based upon the value to the operator, not the value to the owner. In reaching its conclusion the court stated that: 

  • The site must be assumed to have been exposed to the market for a reasonable period and, taking into account the fact that Vodafone was, in this case, sharing the site with EE and H3G, there would be competition; this would produce a higher rental payment as a result of a hypothetical bidding process.

  • However, the court noted that “the same might not be true for sites which satisfy the needs of only one operator and which would not be of interest to competitors. In such cases the Code’s no-network assumption may cause the parties to agree a rent reflecting only the value of the site to the owner and the other consideration[s] which [Vodafone] identified [in its valuation framework]”.

  • The court took account of market evidence of transactions based upon ‘Old Code’ valuations, so reflecting the value to the operator in the hypothetical transaction.

The more favorable ‘no network’ assumption under the Code’s valuation approach would have produced an annual rent of up to £2,250.

Disregards

Lack of access

J Murphy & Sons Ltd v Railtrack plc [2002] EWCA Civ 679 New lease of land that had previously been a former railway goods yard. Railtrack was the landlord. T could only obtain access via his own land. Landlocked land would obviously have less value than land with access. Thus, in order to obtain a higher rent, L argued that the lack of access was a matter to be disregarded, in addition to the disregards expressly set out in s34. Alternatively, L argued the court should include a right of access in the new lease. Both arguments were rejected. Cases based on rent review clauses were not found to be helpful. Passing rent Relevance? Trans-World Investments Limited v Anita Dadarwalla [2007] EWCA Civ 480. Introduction Not many cases are decided on appeal in relation to the rent to be paid under a new tenancy but this is one of them. Section 34 of the Landlord and Tenant Act 1954 provides that:

"The rent payable under a tenancy granted by order of the court under this Part of the Act .. may be determined by the court to be that at which having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing lessor".

The subsection directs that certain matters are to be disregarded. They do not include the rent payable under the previous lease. The issues The principle issue in this case was whether or not the judge was wrong to disregard the passing rent of the subject property under the lease. The judge also disregarded valuation evidence of a neighbouring property as a "rogue figure" on the basis that there was no evidence as to the circumstances in which the rent was calculated. Decision The CA held that he was wrong on both counts. Mummery LJ at para 30:

"In my judgment, the judge was wrong to disregard the passing rent and the rent of No 106 on the basis stated by him. The rents under the current lease and of the adjoining property at No 106 are relevant valuation evidence of market rent of the Property without the need for the court to require the party relying on those rents to produce positive evidence of the circumstances in which they were determined. Rather it is for the party who challenges the relevance of the passing rent and/or the rent of the adjoining property to adduce evidence of circumstances relied on to show that the rents are not relevant factors in the valuation exercise of determining the open market rent."

The judge was wrong to leave the passing rent out of account "on the basis that there was no evidence of the circumstances in which the passing rent had been negotiated in the past." (para 28). He was also wrong to disregard the rental figure for the neighbouring property simply because there was no evidence of how it was negotiated (para 29).

The case was remitted back to the county court (Chancery List) to be retried.

Flanders Community Centre Ltd v London Borough of Newham

[2016] EWHC 1089 (Ch)

Summary

In proceedings for renewal of a lease to a community association, which contained a number of unusual (and possibly onerous) provisions relating to use and repair, the court held that rent should be £1pa. The High Court confirmed that, in the absence of error or serious procedural mishap, it would not interfere with a lower court’s decision.

Facts

A local authority landlord (L) granted a lease of a community centre to a tenant (T) for a term of seven years at an annual rent of £1 (if demanded). The lease further provided that T should carry out various works to the premises within a certain timescale, failing which the rent would increase to £1200 pa. The lease differed from a typical commercial lease in that it contained a number of provisions (some potentially onerous) that related to the property's use as a community centre. When the lease came to an end T remained in occupation under the provisions of the Landlord and Tenant Act 1954. The parties then entered into negotiations but ultimately proceedings were issued by T for a new lease. The parties were unable to agree the level of rent under the renewal lease. Section 34 of the Landlord and Tenant Act 1954 (above) relates to the new rent. Unlike s35 of the 1954 Act (which is concerned with the other provisions of the new lease apart from its duration), there is no automatic default to the terms of the old tenancy, although the passing rent is a relevant factor to take into account (Trans-World Investments Ltd v Dadarwalla) [2007] EWCA Civ 480 - see above). The parties applied to the County Court, which heard expert evidence on behalf of both T and L as to the level of rent.

First instance

In view of the nature, and terms of the original lease, both experts struggled to find comparables. T’s expert concluded that the property had no market value, and that the new lease should be at an annual rent of £1. L’s expert, although finding comparables in terms of property, was unable to establish the letting terms of the comparable properties and suggested a rent of £16,000pa. Her Honour Judge Faber (criticizing weaknesses in both experts’ evidence) concluded that there was no adequate evidence as to market rent and held that the rent under the new lease should be at the same rate as the old lease, namely £1pa. L appealed.

Decision on appeal

The High Court dismissed L’s appeal. The High Court referred to the reasons why an appellate court will not lightly interfere with the original trial court's decision, as summarised by Lewison LJ in Fage v Chobani [2014] EWCA Civ 5. Norris J said, highlighting certain of those observations:

“First, I should not interfere with Judge Faber's findings of fact unless compelled to do so. Second, the trial is not a dress rehearsal. The trial before Judge Faber was the first and last night of the show. Third, in making decisions, Judge Faber will have had regard ‘to the whole sea of evidence presented to her whereas an appellate court will only be island-hopping’. Four, the primary function of Judge Faber was to find facts and identify crucial legal points and advance reasons for deciding them in a particular way. Her duty was to give reasons in sufficient detail to show the parties and, if need be, the applicable court the principles on which she acted and the reasons that led her to her decision. She was not obliged to give reasons that were elaborate. Last, she cannot be expected to deal in detail with matters that were not in dispute before her.”

In the court’s opinion, the judge at first instance had been entitled to conclude that there was no reliable evidence before the court of the current letting value of the property, and so was entitled to place weight on the passing rent when reaching a decision as to the rent payable under the new lease. Fresh evidence on appeal

Comparables

Clear Call Limited v Central London Investments Limited

[2016] EWCA Civ 1231

Summary

The Court of Appeal upheld a decision of the High Court that it had been entitled to refuse to admit fresh evidence on an appeal about a new rent under Part II of the Landlord and Tenant Act 1954. The fact that the relevant date for the purposes of determining the terms of the new tenancy was the appeal date rather than the trial date did not mean that the court had little alternative but to admit fresh evidence.

More detail

T also sought to have the fresh evidence admitted, arguing that the effect of Davy’s of London (Wine Merchants) Ltd v City of London Corp [2004] EWHC 2224 (Ch) was that a court hearing an appeal about a new rent under Pt II had little alternative but to admit fresh evidence, because the relevant date for the purposes of determining the terms of the new tenancy was the appeal date rather than the trial date.

The Court of Appeal disagreed. The effect of decision in Davy’s was not that a court hearing an appeal about a new rent under Part II of the Act had little alternative but to admit fresh evidence. The fresh evidence in that case had been fundamentally different to, and of far greater consequence than, the fresh evidence in the instant case. Further, it had been admitted and subjected to cross-examination by agreement. Whilst there were dicta suggesting that certain types of dispute as to the terms of a new tenancy might lend themselves to the ready admission of fresh evidence, as the dispute in Davy's had been about the terms of a redevelopment break clause, it turned on an evaluation of future rather than past events.

The issue in the instant case had nothing to do with future events. The question was whether the judge had properly relied on the historic transaction as a comparable. No more recent comparables or evidence about market rent had been proffered on the instant appeal or before the High Court. The High Court had been entitled to reject the fresh evidence; it failed the Ladd v Marshall tests for admitting fresh evidence.

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