Assessment of rent in the pandemic - a headache for some time to come
The recent case of S Franses Ltd v The Cavendish Hotel (London) Ltd  illustrates the difficulties in assessing rent in a property market severely impacted by COVID-19. This case has a long history which culminated in 2018 when S Frances Ltd won a landmark ruling in the Supreme Court in relation to its lease renewal with The Cavendish Hotel. Although the landlord agreed to grant a new tenancy, neither party could agree on proposed amendments to the new lease or the amount of rent.
We will look at the final issues in this case and highlight the factors taken into account when assessing rent on a business lease renewal during the pandemic.
S Franses Ltd (SF) was successful in obtaining a renewal of two leases of its premises at 80 Jermyn Street, London after a long battle with its landlord The Cavendish Hotel (CH) – we covered the case in a previous Property Focus here. Following the Supreme Court ruling, CH agreed to grant renewal leases for 15 years, with five-yearly rent reviews and no break clauses. Several aspects of the leases were disputed by the parties including the amount of the rent, interim rent and changes to the lease terms which resulted in an application being made to the county court.
The assessment of rent was the real headache in this case as rents were being assessed at a time when rental values had plummeted and with so many vacant properties in the vicinity of Jermyn Street, there were no comparables which could be used. Apart from the rent under the new lease, the judge also had to determine the interim rent as the tenancy had continued since January 2016 pursuant to section 24 of the Landlord and Tenant Act 1954 (LTA 54).
The parties had instructed rent review valuers as expert witnesses, although both were criticised by the court. SF’s valuer was found to have relied too heavily on a pre-pandemic valuation of a neighbouring property, rather than transactional data and CH’s valuer was regarded as favouring landlords too much.
In relation to the disagreement over the lease terms, the judge followed previous authority which established that the burden of persuading the court to approve changes to existing agreed terms is on the party proposing them. Changes should only be sanctioned on the basis of fairness and on the facts, the judge found in favour of SF, apart from allowing an amendment by CH to resolve an ambiguity in drafting.
During the pandemic, some valuations were based on a percentage reduction of the pre-pandemic rent to take into account the drop in the market, but the judge applied the traditional zoning methodology. He assessed the rent to be £102,000 p.a. which was much closer to SF’s valuation of £96,500 p.a. than CH’s at £174,750 p.a., but considerably lower than the passing rent of £220,000.
The interim rent was more of a problem as the valuation date was over five years ago in January 2016. It was clear that CH’s valuer had not properly valued a year-to-year tenancy as required by the LTA 54 as the starting point for the interim rent decision. Instead, the valuer had based his valuation on a five year term (as SF had been in occupation for that length of time) and overlooked the fact that the LTA 54 intends the interim rent figure to reflect the tenant’s uncertainty of not knowing whether or when its tenancy will be reviewed.
The judge accepted SF’s valuation of £140,650 p.a. as the market rent for a tenancy from year-to-year as at January 2016, but felt it needed to be adjusted to take into account the market value of nearby premises as well as the difference between that figure and the passing rent of £220,000 p.a. He therefore settled on an interim rent of £160,000 p.a.
Although there is no new law here, the case shows the impact of COVID-19 on rental values as the rent under the new lease was assessed to be £102,000, which was a significant drop from the rent of £220,000 under the old lease. The assessment was made more difficult through the lack of lease completions in the vicinity (11 out of 57 shops were empty in Jermyn Street at the time) which meant that it was difficult to find comparables from recent transactions.
The case also provides an insight into how the courts are likely to approach valuations in unopposed lease renewals as the traditional zoning methodology was used rather than assuming a percentage reduction in rental valuations attributable to the pandemic.
The parties’ experts were also criticised for bias which is a reminder that experts should remain objective – using an expert who is heavily in favour of a landlord or tenant can backfire as can been seen from the judge’s comments in this case.