Assessing rent on a lease renewal

When renewing a business tenancy, the landlord and tenant are free to agree the rent but if they cannot agree, the court determines it.  Under Section 34 of the Landlord and Tenant Act 1954 the court has to have regard to the terms of the tenancy and identify what the premises might reasonably be expected to be let for in the open market.  Section 34 then sets out a number of features that are to be disregarded when carrying out this assessment.

A restrictive user clause (for example one which only permits the premises to be used in conjunction with other premises) or practical features on the ground (for example limited access) can limit the number of people who might be interested in taking a lease of such premises.  Such features should not be disregarded or relaxed under Section 34.  They are not inconsistent with the concept of an open market and indeed there is case law that confirms you can have an open market where there is only one interested party.

The lesson for landlords is that restrictive terms in a renewal lease are in almost all cases to be given full effect when assessing the rent first payable and their effect cannot be bypassed by relying on the reference to ‘open market’ in Section 34.  It is not all bad news for landlords, however, as different principles apply on rent review.  Case law tells us that the courts can be more receptive to relaxing the terms of the hypothetical lease being valued on review. 

by Nitej Davda, Associate