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Everything but Covid

The recent decision of HH Judge Parfitt in the Central London County Court in S. Franses v Cavendish Hotel has attracted a degree of attention due to the reduction in the annual rent payable by the tenant. The tenant was paying a rent of £220,000 per annum under its current lease (in fact a combination of two leases) (which leases disregarded on review the depressing effect of the alienation and user covenants contained in the lease), and the judge awarded an aggregate rental of £102,000 per annum (which figure did not disregard the depressing effect on rent of the terms of the lease to be granted and in particular the alienation and the user provisions).

The “headline” figure hides a salutary lesson in recognising that the valuation of a new lease under the 1954 Act is very much dependent upon the physical characteristics of the premises and on the terms to be granted. As was recognised by the Court of Appeal as long ago as 1971 in Cardshops v Davies [1971] 1 WLR 591, CA, it is inappropriate for the court to consider the question of rent until the parties have agreed, or the court has determined, not only what should be the property comprised in the tenancy, but its length and what should be its other terms, since each of these matters is, in principle, capable of affecting the amount of rent payable.

The Zone A rent put forward by the parties’ experts was not substantially different, with the tenant’s valuer contending for £200 psf for Zone A, and the landlord’s valuer contending for £230 psf. The judge alighted upon a figure of £212 psf for Zone A. The parties’ valuers had agreed the areas and the zoning to be applied to each area.

What led to the substantial discount in the overall figure was not the Zone A rate but the various adjustment to reflect the characteristics of the property comprised in the tenancy and the terms of the proposed lease. The adjustments consisted of

(1) An addition to reflect the fact that the premises had a return frontage. The valuers were agreed that this was reflected by a 5% uplift in the rent.

(2) A discount to reflect the fact that the premises had a width (frontage) longer than the depth. The parties’ valuers were agreed as to the principle but not the quantum. The tenant’s valuer contended for a 20% downward adjustment. The judge agreed with this discount.

(3) A discount to reflect the fact that the new lease contained a restrictive user covenant. The tenant’s valuer contended for a 25% discount, with the tenant’s valuer contending for an 18.5% discount. The judge found that the covenant justified a 20% discount. This discount had not applied on the rent review during the term of the current lease as it expressly disregarded the depressing effect on rent of these covenant. This led to a higher rent and thus one of the reasons for the substantial difference between the current rent and that determined under the 1954 Act. The contractual disregard did not, of course, apply to the determination of the rent under s.34 of the 1954 Act.

(4) A discount to reflect the terms of the alienation provisions. The judge found that the terms with respect to alienation justified a 5% discount.

(5) A discount to reflect potentially wide rights of entry for the landlord to enter the property to effect work. The judge found that this justified 2.5% discount.

(6) A discount to reflect the inability of the tenant to effect work to the exterior. The tenant’s valuer suggested a 2.5% discount. As a matter of law works could be effected in accordance with the terms of the Landlord and Tenant Act 1927, and improvements effected in accordance with the procedure provided for by that Act would override any contractual prohibition (section 3(4) of the 1927 Act). Although the tenant’s valuer agreed in cross examination that no discount was necessary if as a matter of law works could be effected, the judge found that notwithstanding the terms of the 1927 Act a 2% discount was justified.

(7) A 5% discount to reflect the length of the term---a 15-year term.

(8) Finally, the question of the provision of a rent-free period in the market was also to be taken into account. This led to a further discount from the final rental figure.

This is not really a case about the impact of Covid. Both parties’ valuers were of the view that Covid did bring about a reduction in the market of approximately 30%. There was no “Covid clause” but no discount for its absence was sought. The real impact on the rental value were the characteristics of the property and the terms to be granted.

Finally, the case is of particular interest with respect to the assessment of interim rent under section 24 D of the 1954 Act. The valuation date was 3 January 2016. The tenant’s valuer had been contending for an interim rent £126,500 per annum assessed on the basis of a tenancy from year to year. That figure was, upon cross examination, increased to £140,650 per annum. This figure was, however, uplifted by the Judge, so that the final figure for interim rent was £160,000 per annum. The “uplift” was justified, because as was apparent from the leading decision of Humber Oil Terminals Trustee Ltd v Associated British Ports [2012] EWHC 1336 (HC), the overriding criterion was that the interim rent was to be one that it was reasonable for the tenant to pay bearing in mind the benefit conferred. The judge pointed out that in considering the determinative question about “reasonable to pay” the court was not limited to matters that might have been in the reasonable contemplation of the parties at the relevant valuation date (such a limitation was agreed to apply to the section 34 year to year market rent assessment). The judge approached the question on the basis that the analysis was “akin to a contractual type quantum merit and not an unjust enrichment type quantum merit” and “so the assessment is approached from within the contractual structure rather than an open question of objective market value.” A number of factors (elaborated upon in paragraph [112]) led the judge to adopt the £160,000 per annum figure.

Joanne Wicks QC acted for the tenant

Wayne Clark acted for the landlord

The full judgment can be found here.


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