Lawbite: Turnover rents on lease renewal – the grapple between turnover and open market rent

• United Kingdom

• Real estate
• Real estate dispute resolution
• Real estate litigation - LawBite

22-02-2022

W (No.3) GP (Nominee A) Limited and W (No.3) GP (Nominee B) Limited v JD Sports Fashion plc (County Court)

An interesting County Court decision from the end of last year has recently been made available. 

In its judgment, the County Court refused to order that the rent provisions in a new tenancy under Part II of the Landlord and Tenant Act 1954 (the “1954 Act”) be based on a turnover rent.  A topical decision given the post-pandemic market where turnover rents are on the rise in shopping centres. 

The landlords had asked the court to determine the terms of a new tenancy of retail premises in the Derbion Centre, Derby which it sought to grant the tenant.  The parties had not reached an agreement as to the new rent and on the matter of interim rent.  It is worth noting that rent in the existing lease was determined based on a percentage of the tenant’s turnover.

By the date of the trial, the landlords were arguing that the renewal tenancy’s rent should be a turnover rent of 8%, which would produce a rent of £496,000 per annum.  The tenant sought an annual fixed rent of £17,700. Absent agreement it was for the court to determine the rent payable under the renewal tenancy under section 34 of the 1954 Act.

Section 34 requires an open market rental valuation between a hypothetical landlord and tenant.  Certain matters must be disregarded, including the tenant’s occupation and goodwill.  A turnover rent, however, takes into account the tenant’s turnover at the property which is contrary to these disregards.  This could therefore result in a higher rent being payable than rent based on an open market valuation and comparable results in the shopping centre, which is not intended by the 1954 Act.  Recognising this, the court imposed a fixed annual rent for the new tenancy of £104,300.

However in delivering the decision the court emphasised that the facts of each individual case must be considered when determining whether to impose a turnover rent, leaving it open for rent in future lease renewal claims to be determined based on a turnover rent. One example given was that of a car parking lease, where turnover is more likely to be determined by the location and size of the car park, rather than the goodwill built up by the specific tenant.  

In relation to rent-free periods, the court decided that the whole of any rent-free period should be taken into account when adjusting the headline rent and no distinction needs to be made between a fitting out period and an incentive rent free period.  This follows the decisions given in the unreported cases of HMV Music Ltd v Mount Eden Land [2012] and Odey Asset Management Group Ltd v Telford [2016].

Finally in relation to interim rent, the court did not follow the default position that the interim rent be the same rent as the rent under the new tenancy, applying the exception in section 24C(3)(a) of the 1954 Act (which applies where the rent for the interim period differs substantially from the rent for the new tenancy, due to a change in market conditions for example).  The court therefore ordered an interim rent of £160,300, significantly higher than the new lease rent.

The court rejected the landlords’ argument that the second exception in section 24C(3)(b) of the 1954 Act (where the terms of the new tenancy result in a substantially different rent compared to the old tenancy) should also apply since the rent under the new tenancy would be a fixed rent, and not a turnover rent as with the old tenancy. The reasoning being that lease terms are defined under section 35 of the 1954 Act, whereas rent is determined under section 34.

Key points:

• there is no current case law on whether a court has jurisdiction to impose a turnover rent on lease renewal. Whether other courts will follow this non-binding decision remains to be seen however it is interesting to see that the court recognised that it may be appropriate to impose a turnover rent in certain circumstances. This is particularly pertinent in the existing property market, where retail tenants entering into leases of shorter terms (whether upon renewal or new leases) are often seeking a turnover rent
• it is clear that each case will depend upon its own facts and good valuation evidence is therefore crucial
• consider potential market changes before agreeing to a turnover rent.  Turnover rents can benefit tenants in difficult market conditions such as during the COVID-19 pandemic, however in good market conditions this can result in tenants paying significantly more rent than market rent
• the interim rent will not necessarily be the same as the rent payable under the new tenancy where there has been a significant shift in market conditions (such as during the COVID-19 pandemic)