Warren Gordon

Warren Gordon

Head of Real Estate Know How

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02 February 2012

The Court has a broad discretion in determining interim rent on a business lease renewal


Neale v Witney Electric Theatre [15 July 2011] concerned the level of statutory interim rent payable by the tenant where the tenant was not granted a renewal lease. The decision will be of interest to the property industry with the interim rent provisions in the Landlord and Tenant Act 1954 ("Act") being an important element in the statutory renewal process for business leases. 

Neale had a business tenancy of a night club and his landlord was Witney Electric Theatre. In 1992 the parties agreed that the rent should be increased to £43,000 a year and this remained the passing rent until the lease's termination. Neale's tenancy was protected by the Act. Accordingly, in November 2006, Witney served a section 25 notice to end the lease on 25 June 2007. Neale had applied for a new tenancy proposing an annual rent of £28,000. In response, Witney proposed £65,000 a year and then applied to court for a determination of an interim rent.

Ultimately, no new tenancy was granted to Neale, but the question remained as to how much interim rent Neale should pay for the period 25 June 2007 (the date of the lease's termination pursuant to the notice) until the tenancy expired on 14 June 2010.

Where the landlord opposes an application for a new tenancy, the Act provides that the interim rent will be the rent which is reasonable for the tenant to pay while the tenancy continues. The court will have regard to the rent payable under the terms of the tenancy and any sub-tenancy, and the rent which, having regard to the terms of the tenancy (other than rent), the premises might reasonably be expected to be let in the open market by a willing landlord, if a new tenancy from year to year were granted.

The purposes behind interim rent provisions are to prevent tenants holding over under the old rent while stringing out proceedings for a new tenancy, and also to provide a cushion for the tenant against the advent of a new and higher rent under any new renewal lease. The latter protection was only necessary in a time of rising rents. However, in this case, there was no future rent between Witney and Neale and, therefore, no need for the cushion.

The County Court judge stated that if the tenancy was to be assessed on a year to year basis, the interim rent might well be lower than £43,000. Indeed, it might be lower than that passing rent by a significant figure, perhaps up to 25%. Despite having regard to that, the judge decided that, against a background of static rent for the premises and substantial increases elsewhere, it was difficult in common sense to understand why it would be reasonable for Neale to pay so much less in interim rent than the rent payable immediately beforehand. The judge, therefore, fixed the interim rent at the same figure as the passing rent of £43,000 a year and Neale appealed. Importantly, at the time of the judgment, it was known that Neale would not be entitled to a new tenancy.

The Court of Appeal supported the judge's decision. The judge had broad discretion in determining the interim rent and his duty was simply to arrive at what he considered a reasonable rent taking account of the passing rent and of the interim market rent on a year-by-year basis. He was entitled to conclude that discounting the rent to reflect a year to year tenancy would have given Neale a windfall and that it was reasonable for the tenant to continue paying at the level of the passing rent. This was a decision very much on its facts, dictated by the judge's knowledge that Neale would not be entitled to a new tenancy.

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