The rent payable under the terms of a renewal business tenancy is governed by section 34 of the Landlord and Tenant Act 1954 (‘the LTA’) Section 34 gives the court the power to determine the level of rent when the parties have not been able to reach an agreement on that aspect of a renewal lease.

The LTA is intended to balance the interests of both landlords and tenants and operates to provide security of tenure to tenants whilst protecting landlords’ rights to receive an open market rent.

Section 34 provides that when determining the level of rent payable, the court will have regard to the terms of the tenancy (other than those relating to rent), that the holding might reasonably be expected to secure in the open market by a willing lessor.

Essentially, the court must have regard to the level of rent that a hypothetical landlord would reasonably be expected to receive from a hypothetical tenant in the current market and for that particular unit.

Recent case law

The recent case of W (No 3) GP (Nominee A) Ltd and another v JD Sports Fashion plc shows us how a court is likely to deal with a landlord’s request for a turnover rent in light of section 34.

JD Sports Fashion PLC (‘JD Sports’) had occupied a unit at a shopping centre in Derby under a lease, the fixed term of which came to an end in 2017. That original lease had included a term that the rent be £175,000.00 per annum, plus an additional rent based on JD Sports’ turnover.

The landlord, W (No 3) GP (Nominee A) Ltd and another, served a section 25 notice bringing JD Sports’ tenancy to an end in June 2017. That section 25 notice did not oppose JD Sports being granted a new lease, but suggested an increased rent.

By the time of the trial, the landlord was seeking a turnover rent of 8% in addition to standard rent. The tenant opposed this and argued for a fixed rent.

One of the issues the court had to determine in this case was whether section 34 of the LTA gave it jurisdiction to order a turnover rent.

The landlord’s position

Counsel for the landlord argued that a turnover rent was, for the purposes of section 34, a ‘rent.’ The landlord argued that section 34 is clear in that the rent to be determined should be reflective of what hypothetical parties would agree on the open market and that the current evidence showed that a turnover rent was appropriate and not an unheard of request. The landlord suggested that an interpretation of section 34 that did not give the court jurisdiction to order a turnover rent would conflict with reality.

The tenant’s position

Counsel for JD Sports argued amongst other things that the phrase ‘the rent’ in section 34 indicated that the legislation assumes the need for one identifiable rent that the property in question would attract in the open market. Counsel also highlighted that section 34 requires the court to calculate any renewal rent on the circumstances of a hypothetical tenant; JD Sports in this case was not a hypothetical tenant but a specific tenant with a specific turnover; contrastingly, the turnover of a hypothetical tenant could not be quantified to such a degree.

The court’s decision

Whilst the court did not go as far as to confirm that section 34 failed to give it jurisdiction to order a turnover rent, it found that in most cases, to order a turnover rent would be at odds with section 34 of the LTA for a number of reasons.

The court noted that the purpose of the LTA is to ensure fair open market rents for landlords, not to penalise successful tenant with healthy turnovers. It was also highlighted that taking a tenant’s turnover during the course of a previous lease into account would be having regard to goodwill attached to the property when in fact, that is specially set out as a factor that should be disregarded when ordering a renewal rent in section 34(1)(b).

Finally, the court noted that when combining a fixed open market rent and a turnover rent, the outcome was such that a rent well in excess of open market value would have been ordered. That is inconsistent with the objective of the LTA.

What does this mean for landlords and tenants?

As ever with litigation, each case before a court turns on its own specific facts, but the above serves as a reminder to landlords that extra pre-trial negotiation in an attempt to secure a tenant’s agreement to a turnover rent may be worthwhile. That is on the basis that clearly, there is no certainty that the court will award any turnover rent at all.

It will be welcome news for landlords however that the court seemingly felt the need to stop short of confirming that it did not have jurisdiction to order a turnover rent.

Key contact: Jessica Dickinson | Tel: 01482 324252