Can Tenants get a Rent Free Period for Fit out Works and Lease Renewals?

• 14 February 2022
• News

The Judgment on a significant retail test case has just been made public involving Boots and Quadrant Estates and CarVal Investments owners of a portfolio of 123 Boot Stores regarding lease renewal claims. The 123 stores are let to Boots under a sale and leaseback arrangement but this case, in particular, centred on the renewal of the lease of Boots’ premises at The Promenade/Princess Street in Bridlington, Yorkshire.

If you are a retail tenant you will be encouraged by the Court’s acceptance of a requirement for flexibility but discouraged to by the treatment of rent-free periods for fitting out periods. Similarly, there was both good and bad news for retail landlords in the findings of the Court.

Key issues the Court found on were:

• Length of term – The landlord sought a ten-year term with no break, the tenant a three-year term with annual breaks. The tenant offered little evidence of its specific intentions for the property. But, given the level of economic and market uncertainty at the time (the trial was at a time when no one knew whether the planned lifting of all restrictions would be a short-lived reprieve from restrictions or not), the Court felt the reasonable balance was a five-year term.
• Break – A third-year break was awarded. The old lease had annual breaks. The landlord was seeking to diverge from the previous lease terms by removing a break entirely and bore the burden of justifying this to the Court. A third-year break struck a balance of providing flexibility to the tenant, which was needed in the uncertain retail market, while giving the landlord greater certainty of term than it previously had.
• Fixed rent increases – The lease had fixed rent increases of 1.5%. There was no evidence provided to the Court of fixed rent increases being common in the market and so the Court determined the new lease should not have a stepped rent increase either. This was separate to whether a rent review should be ordered.
• Rent Review – No rent review was ordered for a five-year term. Had a ten-year term been ordered, the Court would have ordered an upwards only rent review after five years, to reflect current commercial practice.
• Rent – As ever, a detailed analysis of the expert evidence was carried out. Of most interest was the following:
  • Treatment of rent-free periods for fitting out – The Court went against other County Court decisions and held that there should not be a rent-free period for fitting out given the tenant was already in occupation. The Court favoured a valuation approach which was based on reality (Boot did not need a fitting out period) given there was no specific assumption for rent free periods for fitting out works in the 1954 Act. The decision is not binding, other recent County Court decisions have included rent-free periods for fitting out works. Not every case has been subject to detailed submissions on the point and this case shows that it remains an arguable point for landlords to include in negotiations and Court proceedings. Where the current fit out is old and due for renewal, the arguments in favour of a rent-free period for fitting out periods are stronger.
  • Lettings to charities (or other businesses that do not pay rates) should not be discounted when looking at comparable evidence. No business wants to pay more for its premises than it needs to. It should not be assumed that a charity or other business that doesn’t pay business rates would pay more rent than the market rate.

While still relatively uncommon for an unopposed lease renewal to reach a trial, economic uncertainty and the Covid-19 pandemic has provided the backdrop for a spate of recent decisions.

Related content

If you are interested in seeing what other retail Judgments there have been and reading our analysis of them you can read the judgment from October last year on JD Sports versus The owners of the Derbion Shopping Centre and judgments on WHSmith versus The owners of Westfield Shopping Centre and The Fragrance Shop versus The Owners of Westfield Shopping Centre.

Case reference: HPUT Trustee No.1 Limited and HPUT Trustee No.2 Limited v Boots UK Limited

Location, Location, Location – Why location matters in nuisance claims

• 30 September 2021
• News

Jones v Ministry of Defence

A landowner has failed in a claim against the Ministry of Defence (“MOD”) that the use of an RAF base was a nuisance or breach of Article 1/8 of the First Protocol to the European Convention on Human Rights.

To succeed in the claim in nuisance, the claimants had to show the MOD’s activities caused an interference with the claimants’ reasonable enjoyment of their land.

Crucially, what is “reasonable” is looked at objectively and depends on the circumstances including the neighbourhood/locality of the property and whether the defendant’s use of its land was necessary for common and ordinary use of the land and carried out in a way that is reasonable having regard to a neighbouring property owner’s interests.

The key facts/findings of the Court were:

• The claimants had acquired its land, previously owned by a water board and used as a depot in connection with a nearby reservoir, in 2003. It wanted to change the use of the site to provide guest accommodation with premises for commercial lettings and a children’s nursery.
• The MOD had used its land since the 1950s for training pilots and since 1976 by using jet planes (with replacement jets brought in since 2009).
• The Court accepted that the noise of planes flying close to and over the claimants’ land was very loud, annoying and disruptive. Since 2003 there had been a decrease in flights over the claimants’ land, albeit the flights were now louder than before due to new jet planes but the overall impact of the noise was no greater than before.
• The use of planes on the MOD’s land was ordinary use of its land in 2003 and in 2021 given the longstanding use of the land for pilot training.
• The MOD had sought to keep noise to a reasonable minimum for their operations and specifically sought to address the claimants’ concerns about planes flying over the nursery and an activity centre on the claimant’s land.
• The tranquillity of the area had for many years been disrupted by the sound of planes from the MOD’s land since the 1950s and since 1976 by jet planes. The noise had been part of the environment for generations. The pre-existing activity was part of the character of the locality and so would be taken into account when considering whether the existing use was a nuisance.
• The claimants were using the land in a way that was more sensitive to noise than before. A landowner could not introduce a more sensitive use to land and complain about another landowner’s activity which was not previously a nuisance and had been carried out in a reasonable manner over a number of years.
• There was a significant public interest in the use of the MOD’s land continuing to train pilots.
• The Court dismissed the claims under Article 1 and Article 8. Regarding Article 8, the MOD’s use of land was lawful and in the interests of national security. A balance had been struck between the MOD’s use and those in the vicinity since the MOD operates a noise amelioration scheme for householders affected by noise (the claimants did not quality for this as the noise was not sufficiently loud) and the MOD had taken steps to minimise the noise. Regarding Article 1, the claimants bought the land as it was (subject to the pre-existing use of the MOD) and had not been deprived of what they bought, it only impeded the claimants from developing something new on their land. Article 1 does not create a right to acquire property and further income.

Key takeaway points

The facts of the case are key to understanding the Court’s decision but the following points should be kept in mind by landowners and those facing potential nuisance claims:

• What is a nuisance in one neighbourhood will not be a nuisance in another. An activity can be noisy and disturb a neighbouring property owner without constituting a nuisance.
• Use of land in a reasonable manner for a long period of time can change the nature/character of the neighbourhood. The Court will consider the characteristics of the neighbourhood/locality when considering if use of land constitutes a nuisance. Objecting to a longstanding use of land may be difficult if the defendant is not putting its land to a new or varied use.
• Landowners should take into account neighbouring properties and seek to carry out activities in a reasonable manner, where possible taking steps following a neighbour’s complaint to mitigate the disturbance to the neighbour where reasonably possible. As ever, seeking to act in a reasonable and neighbourly manner will assist.
• Where a claimant has changed the use of its land, making it more sensitive to a pre-existing use of a defendant’s land that was not previously a nuisance, the Court is unlikely to take into account the more sensitive use the claimant wishes to put its land to.

Will Leney is a Senior Associate in our Property Litigation team.

A PDF copy of the article above is also available to download here.

Clarification on ‘vacant possession’ break conditions

• 30 September 2021
• News

Capitol Park Leeds PLC (1) Capitol Park Barnsley Limited (2) v Global Radio Services Limited

The Court of Appeal has clarified that removing landlord’s fixtures will not prevent a tenant meeting a break condition of providing “vacant possession”.

The tenant, Global Radio Services Limited, sought to exercise its break option in a lease of a broadcasting studio in Leeds. As is often the case, the break option was subject to a number of conditions precedent. One of the conditions was that the tenant provided “vacant possession” on the break date.

The tenant carried out an extensive strip out process removing numerous items which were part of the original base build and belonged to the landlord (ceiling grids, ceiling tiles, fire barriers, boxing to columns, floor finished, window sills, fan coil units, ventilation duct work, pipework connections, office lighting, smoke detection system, emergency lighting, radiators, heating pipework, floor boxed, ceiling void small power and sub mains cabled). Those items were not reinstated, the tenant hoped to reach a financial settlement before the break date and did not have time to reinstate the items which had been removed.

Crucially for the tenant, the break condition only referred to providing “vacant possession” and did not refer to compliance with other tenant obligations in the lease.

The Court followed the traditional test of vacant possession meaning returning a property (as it stood on the break date) without:

• people;
• chattels; and
• legal interests (such as sub-leases).

The Court stated that the physical condition of a property was not part of the test of vacant possession because it would present a number of unintended consequences. For example, a tenant would be unable to satisfy a vacant possession condition if the property was damaged by an insured risk and not reinstated by the landlord in time.

While the landlord could not frustrate the break option, it could pursue a dilapidations claim regarding the missing items (the lease contained typical wording in a separate clause to the break option that the tenant was to return the property with vacant possession and to have complied with the tenant’s obligations in the lease).

Vacant possession conditions are becoming less prevalent in new leases, however occupiers should keep the following in mind:

• Interrogate any conditions precedent to a break option at the earliest possible time to ensure there is a clear understanding as to what is required. Where necessary/possible, seek amendments to heads of terms and draft documents.
• Leaving behind chattels/tenant fixtures in the property can result in vacant possession not being given. If in doubt, clearing items from the property is likely to be the best option to ensure the condition is complied with.
• When agreeing to take space subject to a landlord obtaining vacant possession, consider including a clear definition of what is expected by the parties.

In light of the decision landlords should consider:

• Early advice from a dilapidations surveyor to put the tenant on notice of its obligations when returning the property;
• Ensuring any new break clauses include set parameters of what must be left in the property at lease end (avoiding void periods while landlord’s fixtures are reinstated).

Will Leney is a Senior Associate in our Property Litigation team.

Restrictions on winding up petitions and statutory demands

• 20 September 2021
• News

Regulations taking effect on 1 October 2021 (and set to last until 31 March 2022) will replace the current restrictions creditors face in winding up debtor companies.

The regulations mark a transitional period as the Government takes steps over the coming six months to remove restrictions creditors have faced to commercial debts.

Creditors will be able to serve and rely on statutory demands but, the new regulations impose additional conditions before a winding up petition can be applied for on the basis the company is unable to pay its debts, the usual ground relied on by creditors.

Tenants of commercial premises will retain some protection until 31 March 2022 in certain cases. A landlord will be unable to obtain a winding up order if the debt comprises rent (or any other payment due under the lease) which are unpaid “by reason of a financial effect of coronavirus”.

In all other cases creditors will be able to seek winding up orders for liquidated sums which are unpaid provided certain conditions are met including:

• A 21-day notice. The notice confirms that the creditor is seeking a proposal from the debtor for payment and that if a satisfactory proposal is not made within 21 days that the creditor intends to apply to wind up the debtor. Creditors will be able to serve statutory demands at the same time and do not need to wait until the 21-day notice period has passed before issuing statutory demands.
• The debt must be £10,000 or more. If more than one creditor wants to present a petition together, the total debt must be £10,000 or more.

When a creditor seeks a winding up order, if the debtor makes proposals for payment, the creditor must give its reasons to the Court why those proposals were not satisfactory. We anticipate the Court will review these reasons when considering whether to exercise its discretion to wind up a company.

In the right circumstances statutory demands winding up petitions will become a viable option for creditors to seek to wind up a company. While the regulations go some way to returning to a pre-Coronavirus position, landlords will still face additional uncertainty from the regulations and questions surrounding a winding up petition being an abuse of process to enforce a commercial debt remains.

Will Leney is a Senior Associate in our Property Litigation team.

A PDF copy of the article above is also available to download here.