19 November 2018

Making Grosvenor Square great again or blighting a tenant?

Unlike the 1954 Act, the commercial leasing market is constantly evolving and the extent to which the Court takes into account market practice is often uncertain. The recent decision of Dukeminster Limited v West End Investments (Cowell Group) Limited provides guidance on the Court's approach to rent free periods for fitting out works and the common market practice of upwards only rent reviews. 

It highlights the consequences of not providing detailed factual evidence and parties should take care when deciding if a term in a lease is important enough to go to Court.

Experts (and those instructing experts) should also view this case as a cautionary tale of the risks associated where valuation principles are not agreed. 

Background facts

The property was close to Grosvenor Square and the redevelopment of the former US Embassy. The tenant tried to use the redevelopment to seek a short-term lease, a flexible break option and a reduced rent by citing fears of the disruption caused as a justification. Despite an error by the landlord's solicitors, the Court decided the landlord's section 25 notice was valid. Of more interest is the Court's approach to deciding the outstanding terms of the tenancy (length of term, rent review, a break option and the rent).

Length of term

The Court had to decide what was reasonable. Despite the tenant asking for a 5 year term, 10 years was granted with the following being key considerations:

  • Comparable evidence suggested 10 years was loosely the normal practice in the market.
  • The tenant argued it needed a 5-year term to suit its future business needs which would require alternative space. However, no evidence was produced of what those future needs were or that alternative space would be a better fit for the tenant.
  • The lease allowed assignments. The tenant could assign if it no longer required the property and, in the Court’s view, would not be difficult given the desirable nature and location of the property.

What is clear is that while market practice was a relevant factor, it was not conclusive and should not be seen as definitive. 

Rent review

Although there was no rent review in the old lease, an open market review in the fifth year was determined to be reasonable. Primacy was not given to market forces favouring upwards only reviews.

The Court did not feel an upwards only review was fair, on this occasion, and that an upwards and downwards review would be acceptable to a willing hypothetical landlord. Without going into detail, the door was left open for a Court to order an upwards only review in the right circumstances.

Break clause

No break clause was awarded. The tenant wanted a rolling break to be exercisable if the redevelopment became, in the tenant's view, "intolerable". While events that might affect a tenant can be a reason for seeking a break clause, the Court did not consider the request was justified or practical:

  • The works were unlikely to affect the tenant to make occupation intolerable. Large-scale developments often take place in central London with non-percussive methods for demolition. There was nothing to suggest the development would not accord to public law obligations or comply with Westminster City Council's Code of Construction Practice.
  • The break envisaged by the tenant would result in such an increase in the rent that the rent would be too high.
  • Practically, a break exercisable if the tenant thinks the works are “intolerable” is subjective and the Court was not satisfied how this could be measured. If a proposal had been put forward with a break linked to objective conditions such as specific and measurable noise and vibration levels, the Court may have given the proposal more consideration.

Rent

Both experts applied completely different methods for assessing the rent. The tenant's expert focussed on the redevelopment, the inability to sub-let the lease and a restrictive use of two flats that were part of the property. Therefore, the only way to let the premises was to do so at a competitive low rent. The landlord's expert sought to rely on comparable evidence taking into account the nature and location of the premises (including the possible benefits of the development) resulting in a higher figure.  

The two points to take away from the assessment of rent:

  1. The tenant's expert's opinion was completely disregarded, and with nothing to compare it to, the landlord's expert approach and assessment of rent was followed; and
  2. The Court accepted the comparable evidence that a 3-month rent free period for fitting out works reflected the market standard and should be factored into the calculation of rent in the new lease.

Conclusion

While a decision on a specific set of facts, the approach taken to the disputed terms is helpful guidance. As a more general point, this case highlights the importance to landlords and tenants (and their advisors) of the importance of providing thorough and thought out evidence to justify why certain terms are being sought. The Court will scratch beneath the surface with speculative or ill thought out proposals being picked apart. If there is a completely different methodology by experts, serious thought should be given to an expert providing a further report using the alternative methodology.

Will is an associate in our Property Litigation team.

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