How do you agree the terms of a renewal lease?
As we know, the Landlord and Tenant Act 1954 (“the Act”) allows business tenants’ leases to continue after the fixed term expiry date. Either party can then apply to court for a new lease to be entered into. The parties will often negotiate the new terms themselves, but these negotiations tend to stop at the rent and the term length. The other terms are left to be agreed when the new lease is drafted.
The legal basis on which these other terms should be agreed is governed by section 35 of the Act. This states that in setting those terms, “the court shall have regard to the terms of the current tenancy and to all relevant circumstances”.
What does this mean in practice?
The leading case is O’May v City of London Real Property Co Ltd (1983). Here, the House of Lords held that the court should not generally use its discretion to change lease terms: the new lease should be the same as the old lease. If a party wanted to change any terms, they must show that it is fair and reasonable. Changes are not permitted just to fit with market practice.
In O’May, the old lease had no service charge provisions and, to reflect market practice, the landlord asked for these to be added to the lease. The court refused.
The question of what is “fair and reasonable” has just come before the High Court in London. This looked at whether the tenants at Smithfields Market had to accept a service charge in addition to the yearly rent. Here, the landlord was successful.
What was the difference?
The court held that it was just and fair that the tenants should bear the fluctuations in running and maintenance costs during their 15 year leases, particularly since these costs directly affected the running of their businesses. In O’May, the service charge related to the building as a whole, rather than the tenant’s premises.
Furthermore, the Smithfields tenants’ leases had previously been renewed and in the original leases, they were required to pay an annual rent and service charge. When the leases were previously renewed, the parties agreed to an all inclusive rent, but with an explicit acknowledgement in the leases that this payment structure was in dispute and either party could revive this issue at the next renewal.
So what have we learnt?
Lease terms can not be changed to reflect market practice. But, if there are good grounds and it is fair and reasonable in the particular circumstances, the courts are willing to change the lease terms. The overriding presumption is that the current terms will pervade the new lease and it is up to the party requesting the change to provide valid justification.
Burt Brill and Cardens Solicitors have a team of expert lease extension solicitors. Contact us today or visit us in Brighton, Worthing, East Grinstead or London.