W (No.3) GP (Nominee A) Limited and another v JD Sports Fashion plc
The Judgment dated 22 October 2021 in relation to this interesting lease renewal case of a Unit let to JD Sports in the Derbion Centre in Derby has recently been made public. Gary Cowen QC instructed by John Kittle of DLA Piper LLP acted for the successful tenant, JD Sports Fashion plc
It is the first considered Judgment as to whether, absent agreement between the parties, the Court can order a turnover rent.
The Premises were let in 2007 for 10 years at a turnover rent based on 8% of gross sales. This had produced a rent of circa £500,000 per annum for the Landlord.
After a 4 day Trial, and considering some 40 comparables, the Judge decided a turnover rent in the renewal Lease 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).
Given the rise in online shopping, the effects of the pandemic, and the size and configuration of the Premises, the Judge decided that there would be limited interest in the Premises and any hypothetical tenant would have an extremely strong negotiating position.
The news article with a link to the Judgment can be found here.
Jonathan Ross, a commercial property litigation partner at Forsters LLP had some follow-up questions for Gary.
- JR: Was there any particular reason the case took 4 years to reach Trial and why it did not settle beforehand or be referred to PACT?
GC: I’m not sure I can recall the exact reasons for the delay although the pandemic probably didn’t help. One of the strange aspects of the case was that the parties effectively swapped positions. The tenant’s application sought a turnover rent on the basis that that was what was in the existing lease. The landlord sought a fixed rent. When they took further advice on the point, JD’s position changed so that they were now seeking a fixed rent whereas the landlord changed to seek a turnover rent. In the current market, it is usually tenants who are pressing to agree a turnover rent but here, the turnover rent provisions in their existing lease were massively disadvantageous to JD Sports resulting in them paying, as the court determined, many times the actual market rent for their unit. I don’t really know why it didn’t settle. The parties were too far apart in their expectations, I suppose.
- JR: The Judge was critical of the experts not being sufficiently impartial and she commented on how far apart on values the respective experts were, and how their evidence initially was focussed on their own client’s case, so what particular lessons should be drawn from this? Is there an argument for there to be a joint single expert on renewal cases?
GC: I think there’s always a danger with having two experts that the experts will, to an extent, focus on their client’s case whilst at the same time seeking to justify that position on the evidence. That was perhaps exacerbated in this case by the fact that the landlord was seeking a turnover rent and advanced a fixed rent only in the alternative whereas JD were advancing a rent which was significantly less than the passing rent. I think there’s an argument for having a single joint expert on a renewal case but I can’t see too many litigants volunteering for that to happen. The court is completely dependent upon the expert evidence so if the joint expert doesn’t favour your view, it’s then almost impossible to rescue the position. As a litigant, you probably wouldn’t want to take that risk even though, theoretically, there should be no significant difference between the view of the single joint expert and the view of the expert instructed by either side. As we know, it doesn’t work like that in practice.
- JR: Given the number of comparables within a shopping centre, and the variety of different incentives and terms, is valuation of a Unit in a shopping centre made more difficult rather than easier?
GC: It’s a bit of both. It’s easier in the sense that there are likely to be a number of comparables in an almost identical location so that variations for location are of minimal importance. That’s clearly better than having to rely on comparables which are in locations which may be nothing like the subject property. The variety of incentives and terms raises an important point which became an issue in the JD case. When looking at a comparable, the court must (i) look at any side letters or collateral deals done with the tenant as they represent the “real” agreement between the parties and (ii) the court must take into account the total value of any incentive package given to the tenant. In the JD case, the incentive packages being given in some cases resulted in the tenant effectively being paid to occupy their units; yet the headline figures were being advanced in support of the landlord’s case. The Judge was very clear about this in her judgment.
- JR: Was this a case that, like so many, really comes down to finding one particularly relevant comparable in determining the rent and the interim rent, rather than relying on a number of comparables?
GC: My experience of lease renewals is that they fall into one of two camps; some where the Judge focusses on one or possibly two comparables and then relies on them almost exclusively and some where the Judge takes a wide spectrum of comparables and then tries to squeeze the subject property into the “right” place in that list. I am not sure that the determination of the rent in this case falls into either category. Having concluded that a turnover rent was inappropriate, the Judge’s starting point was to take a midway point between a rate per square foot for a range of comparable transactions in 2018 and a single comparable transaction dated 2021 but which was actually agreed in 2019, pre-pandemic. She then adjusted that figure by reference to various factors including the change in the market from 2018. I think the position is more clear-cut in relation to the interim rent where the Judge used a single comparable from 2017 as her starting point before adjusting.
- JR: Is this the end for turnover rents on renewal of retail premises given that, whilst the Court can order a turnover rent if this is what the hypothetical landlord and tenant are likely to have agreed, the Judge held it is inappropriate where rental values are much lower than a standard turnover rent would be?
GC: I think it’s hard to see a way back for it although the Judge certainly left the door open for turnover rent to continue to be argued. In some ways, it would have been easier for practitioners if she had concluded that the court simply didn’t have jurisdiction to determine a turnover rent. Indeed, there is something of a paradox in the way in which the case was decided. The Judge’s suggestion is that a turnover rent will not be appropriate where it can be shown that the tenant will, as a result, pay a significantly higher (or, presumably, lower) rent than a fixed open market rent because that would be contrary to the policy of the 1954 Act. But if you have to assess the actual rent which would be paid by the actual tenant, that overlooks the disregard in s.34 of the tenant’s occupation of the premises. The hypothetical tenant is not necessarily the actual tenant so how does the court know whether the rent payable by that tenant will be the same as the fixed open market rent which would otherwise have been determined. The Judge actually says at  that ordering a turnover rent would result in the actual tenant paying significantly in excess of the open market value and would “take into account the statutory disregards of goodwill and occupation highlighted previously”. My reading of that is that she is saying that it would wrongly take into account something which the Act says must be disregarded. If that reading of the judgment is correct, then it is hard to see why a turnover rent would ever be appropriate.
- JR: This was a case where it was the Landlord seeking a turnover rent on renewal and it offered a capital contribution of £200,000 if the Tenant would agree to it. Is that permissible under the 1954 Act?
GC: The 1954 Act doesn’t provide for the payment of a capital contribution. It was, essentially, a notional capital contribution designed, I imagine, to allow the landlord to quote a higher “headline” figure for rent. I am not really sure why it was done that way.
- JR: As is common with cases spanning the pandemic, the Judge set a different, and higher, interim rent. Are there any lessons to be learnt from this, particularly as to the relevant valuation date?
GC: The relevant valuation date was agreed as 24 June 2017 so there wasn’t much debate about that. The more interesting point on interim rent was which of the exceptions under s.24C(3) of the Act applied in the case. The landlord argued that if a fixed rent was determined that would mean that the terms of the new tenancy would differ from the terms of the existing tenancy (which included a turnover rent provision) such that the newly determined rent would be substantially different from the interim rent. The Judge held that that provision was intended to apply to “terms” as set out in s.35 rather than a s.34 rent provision and that a turnover rent provision was nonetheless a rent provision which did not fall within the ambit of s24C(3)(b).
- JR: Is any Appeal likely?
GC: Not to my knowledge
- JR: Can you reveal what Decision the Judge made as to costs?
GC: The parties agreed a costs order so the Judge didn’t make any decision. The landlord paid part of my client’s costs.
- JR: What lessons did you learn from this case, apart from how to squeeze it into a 4 day Hearing?
GC: Never informally to ask for the hand down of judgment to be delayed by a couple of days to allow me to get back from holiday!
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