A judgment dated 22 October 2021 relating to turnover rent in a business lease renewal has just been made public (W (No 3) GP (NOMINEE A) Ltd & W (No 3) GP (NOMINEE B) LTD v J D SPORTS FASHION plc). The case illustrates how the retail market has so greatly changed in relation to rental values and turnover rents.

It is the first considered Judgment as to whether, absent agreement between the parties, the Court can order a turnover rent. And it is yet another Judgment where the valuation experts are criticised for being too far apart and not sufficiently impartial.

SPOILER ALERT

If you do want to read all the details below, and don't just want to know the result, look away now!

The Judge decided a turnover rent was not appropriate given it would far exceed the rental value of the Premises and he held that the new rent should be £104,300 per annum (based on an ITZA rate of £67.04 psf) for a 5 year lease with a right to break after 3 years. The interim rent payable from June 2017 until the new lease starts was set at £160,300 per annum (based on an ITZA rate of £84.20 psf as at 2017).

THE RELEVANT FACTS AND FINDINGS

The Facts

The Premises are in the Derbion Centre in Derby. They comprise 9,072 sq ft on the ground floor and mezzanine. It is an irregular shape, being wide at the front and narrowing towards the rear.

The Premises were demised to the Defendant tenant ("the Tenant") for 10 years from 24 June 2007 at a base rent of £175,000 with a turnover rent based on the amount by which 8% of gross sales exceeded the base rent.

By the time the Lease expired, the base rent had increased to £205,723 per annum. However, with the turnover top-up, the Tenant had been paying over £500,000 per annum.

Originally, the Claimants ("the Landlord") proposed a fixed rent of £282,000 for a new 10 year lease. The Defendant counter-proposed a base rent of £160,000 per annum for a 5 year lease with a turnover top-up based on 5% of turnover.

By the trial, the position of the parties had reversed due to the changes in the market. The Landlord sought, in return for a capital contribution of £200,000, a turnover rent at 8% (which would equate to £496,000 based on the Tenant's current estimated turnover) and the Defendant sought a rent of just £17,700 per annum (or 0.29% of turnover if a turnover rent was ordered).

The Findings

The Court does have jurisdiction under the Landlord and Tenant Act 1954 ("the 1954 Act") to order a turnover rent although, as this is so specific to the actual tenant, this sits uneasily with the rental value being based on a hypothetical letting between hypothetical parties, as well as with the disregard of the tenant's goodwill built up through its period of occupation, and the disregard of any improvements.

However, where turnover rents are not the norm and/or will result in a figure substantially above the open market rental value, it is likely to be inappropriate and not to be in accordance with the principles underlying the 1954 Act whereby any new rent should reflect market value.

In cases where, such as a car park, the likely turnover is discernible and the statutory disregards are of little relevance, then a turnover rent may be appropriate.

Given the rise in online shopping, the effects of the pandemic, and the size and configuration of the Premises, there would be limited interest in the Premises and any hypothetical tenant would have an extremely strong negotiating position.

Having considered quite a number of comparables from within the Shopping Centre, and noting the substantial fall in rents, the Judge held that a turnover rent producing a highly inflated rent was inappropriate and that a fixed rent should apply instead.

The Judge noted the closure of both Debenhams and Topshop and highlighted the difficulties in discerning the true rental value of comparables given the myriad incentives and lease terms involved. He considered little weight should be given to rents agreed as part of CVAs. Having considered recent lettings, and noting that the respective experts were at £72.72 and £61.35 psf, the Judge split the difference at £67.04 psf ITZA with a resulting rent of £104,300 based upon:-

  • a 15% reduction for frontage;
  •  a 5% reduction for shape;
  • a divider of 13 for the mezzanine space; and
  • a 20% discount for the fall in the market since 2018.

With regard to interim rent payable from June 2017, the Judge found that, given the sharp change in the market over the 4 years, Exception A under the 1954 Act applied so that the interim rent should not be the same as the new rent. The experts argued for £255,500 and £139,000 per annum and the Judge, having considered comparable evidence as at 2017, awarded an interim rent of £160,300 based on £82.40 psf ITZA.

A separate hearing was fixed to deal with the costs of the Proceedings and this would no doubt have involved considerable argument given the Landlord failed as to turnover rent but the fixed rent was considerably higher than that argued for by the Tenant. The result is currently, and probably will never be, public.