Striking a balance – business lease renewal dispute in court

Just breaking out of my Business Rates bubble for this article: an interesting ruling has come to light concerning lease renewals.

We all know that the length of lease renewals have dropped off a cliff in recent years –  figures from the British Property Federation (BPF) show the length of a commercial lease has fallen from 7.8 years in 2003 to just 5.8 in 2013. Less than 6% of commercial leases granted in 2013 were for more than 10 years.

Many businesses now require flexibility in their leases with many tenants seeking short leases and/or break options. Tenants now expect shorter leases – often at odds with their Landlord’s expectations – especially when the existing lease is for 15-20 years.

The length of lease at renewal was the subject of a recent court case of Iceland Foods Ltd v Castlebrook Holdings Limited [2014].

In this case, the parties had engaged in the lease renewal procedure under the Landlord and Tenant Act 1954. Unable to agree a term the parties referred the matter to the County Court for a decision.

Iceland Foods Ltd wanted a renewal lease under the Act for a term of 5 years. The landlord didn’t oppose renewal but wanted 15 years, arguing this was standard in the supermarket industry and a shorter term would have had an adverse affect of the value on the reversion. Iceland argued that the market was volatile and the store itself was underperforming.

In the end the court opted for an even split with the length of the new lease being set at 10 years with no break option. The judge disregarded both the standard policies of the parties and market value evidence as “irrelevant” but said he needed to look at each case based on its own facts.

In this particular case, Iceland had already been in the property 20 years and had reported on its website how well the whole chain of stores had done during the recession; although the performance of the individual store in question had declined.

This was a decision taken at County Court so other courts aren’t obliged to follow the same reasoning in future but the approach taken by the judge could set some sort of precedent for similar cases in the future.

It’s unusual for a judge to order a tenant to take a lease longer than it has asked for, but it’s clear from the Iceland case, from now on, you shouldn’t presume the tenant will get their own way. That rule of thumb is now being questioned and judges may require tenants to have sound justifications for seeking shorter lease terms on renewal in the future.

If you came on to this article expecting business rates, don’t worry I will be back on my pet topic later this week having just calmed down after reading the Government’s feedback so far on how to combat business rates avoidance.