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Rent free or not rent free, that is the question

  • United Kingdom
  • Real estate litigation - LawBite

02-03-2022

HPUT Trustee 1 Limited and HPUT Trustee 2 Limited v Boots UK Limited (County Court at Central London)

An interesting decision from last summer has recently been made available. It comes from the County Court in Central London and represented the first in a batch of 123 claims between the HPUT entities as landlords and Boots as tenant, for the grant of new tenancies under Part II of the Landlord and Tenant Act 1954 (the “1954 Act”).

Originally this first batch of proceedings consisted of 4 claims for the grant of new tenancies to Boots, but 3 of the claims were settled before trial.  A number of issues were raised but the one which people may be most interested to see related to rent free periods/inducements. 

Rent Frees

The court’s practice has, in recent years, been to take the whole of any rent-free period into account such that it has to be assumed that the hypothetical tenant is paying rent from day one – the valuation practice is to net back the whole rent free period over a suitable period of years (usually depending on the term certain). No distinction is therefore made between a fit out rent free period and a pure inducement rent free.  This follows the decisions given in the county court cases of HMV Music Ltd v Mount Eden Land [2012] and Odey Asset Management Group Ltd v Telford [2016].

In this decision the court decided that no part of the rent free period needed to be taken into account leaving a higher headline rent.  There was no pure inducement so the treatment of that element remains at large. The rationale was that in reality, the tenant would not be carrying out fit out works as it was already in occupation and operating from the premises.

Other interesting findings were in relation to the fixed rental uplifts, the term certain and rent reviews.

Annual fixed Uplifts

The landlord asked that the new lease include a fixed annual rent increase of 1.5% as contained in the existing lease.  The Judge decided that, absence agreement between the parties, it was to determine the issue under s34(1) of the 1954 Act (which sets out how the court is to determine the rent) rather than under s34(3) of the 1954 Act (which allows the court the discretion to include rent review provisions in the new tenancy). As none of the comparables presented to the court had fixed rent increases, the court determined that the new lease should not either.

Term and Break:

The Landlord sought a 10 year term with no break; the tenant was successful in securing a 5 year term with a break at the 3rd year.

The existing lease provided for annual breaks but expressly stated that this arrangement should be omitted from any renewal lease. The party deviating from the terms of the existing lease usually has to justify any deviation, but given the wording in the lease, the court had first to decide which party was deviating from the existing lease.  

The Court decided that it was the landlords’ deviation.  A 5 year term with a break at year 3 would give the tenant the protection it required, particularly given the current uncertainty in the retail market, but it would also offer sufficient security to the landlords.

Rent Review:

Given the 5 year term of lease granted, the court decided that no rent review was required in the new tenancy.  The court did comment, however, that had it been required to consider rent review it would have ordered an upward only review (as requested by the landlord) rather than an upward or downward review (as requested by the tenant).

  • whether other courts will follow this non-binding decision remains to be seen and all lease renewals are heavily dependent on the existing lease being reviewed, the type of tenant and the specific facts around the valuation date. The decision offers a reminder, however, that there is still some unpredictability where it comes to the court’s approach to determining terms under the 1954 Act
  • the decision made in relation to fit out rent free periods will be particularly welcome to landlords.

The court did not deal with pure inducements which are common in office lettings. A fair middle ground would be to take a post fit out but pre-market inducement rent into account on renewal (or a net effective rent).