14 February 2022

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

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

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