The decision in Iceland Foods Ltd v Castlebrook Holdings [2014] PLSCS 95 (CC) demonstrates the approach of the Court in determining suitable terms for commercial lease renewals under the Landlord and Tenant Act 1954 (the "Act").
The facts
Iceland Foods Ltd ("Iceland") held the assigned lease of a high street retail unit in Sandbach. The unit comprised almost 10,000 square feet, divided over the ground and first floor - the latter of limited use to Iceland. The assigned lease expired in December 2011 so in anticipation, in January 2011, Iceland served a s.26 Notice to continue in occupation. The freeholder served a counter-notice not opposing the grant. However, shortly afterwards, Castlebrook Holdings ("Castlebrook") acquired the reversionary interest from the freeholder.
In a Part 8 Claim, Iceland reiterated its proposal for the new Lease terms: a five year term; the passing rent of GBP 37,500 pa; and otherwise identical terms to its previous Lease, subject to usual modernisation provisions.
Castlebrook did not oppose the renewal. However, it counter-proposed with the following changes: a fifteen year term; a starting rate of GBP 182,350 pa; and five year rent reviews.
Renewal term
At trial, Iceland argued that it operated in a competitive industry. Market volatility and underperformance meant that long-term commitments were too inflexible for its business. Castlebrook asserted that fifteen years was the standard term in modern leases.
The Judge looked to s.33 of the Act:
"...determined by the court to be reasonable in all the circumstances...not exceeding [fifteen] years..."
and highlighted its lack of reference to market conditions. The Court resolved to balance the interests of the landlord and tenant in light of this. The Judge deliberated on the declining profits produced from the unit, despite Iceland as a whole self-publicising its success through the recession, Iceland's occupation of the premises for over twenty years of the original 35 year lease and the individual policies of the parties.
A ten year term was found reasonable in honouring the primary purpose of the Act - protecting the carrying on of tenants' businesses. It would encourage capital expenditure but would not diminish the value of Castlebrook's reversionary interest. The internal policies of the parties were irrelevant in this decision.
Rent
In contrast, section 34(1) does refer to market conditions when assessing rent:
"The rent payable...that at which...the holding might reasonably be expected to be let in the open market...".
Disregarding Iceland's previous occupation and any goodwill, the Court weighted expert evidence. Freely negotiated lettings were preferential to renewals and reviews whereas arbitration awards or renewal proceedings were ignored. Additionally, the location and specific market of the unit were taken into account, alongside the changing demographic of local retail culture. Where evidence was lacking, convenience stores and zone A rates were utilised.
The first floor of the unit was discounted due to its relative lack of trader use whilst a market rate was allocated to the ground floor. The Court ordered a rent of GBP 63,000 subject to review after five years.
Conclusion
Although not a binding ruling, this case gives greater incentive for both landlords and tenants to agree renewal terms outside of Court. Companies should desist from relying completely on internal policies as the Court is 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 and separately assess the usability of multiple floors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
