Unopposed lease renewal: it's good to talk

A recent case has decided that a section 25 notice served on the wrong person was valid and made an order for terms on an unopposed lease renewal.

Facts

In Dukeminster Ltd v West End Investments (Cowell Group) Ltd, the tenant occupied business premises in Mayfair, London. The contractual term of its lease had come to an end.

Under the Landlord and Tenant Act 1954, tenants of business premises have the right to remain in occupation once the contractual term of their lease has expired and to request a new lease on similar terms. To end the lease or to start the renewal process, either the landlord or the tenant needs to serve a statutory notice.

West End Investments, the landlord, served a statutory notice under section 25 of the 1954 Act to start renewal negotiations or, in the alternative, to end the tenancy. But the notice stated the name of a previous tenant Dukeminster (UG) Ltd, rather than the actual tenant, Dukeminster Ltd. Because of this, the tenant objected to the notice and argued that it was invalid, taking the opportunity to serve its own notice under section 26 of the 1954 Act. 

Dukeminster Ltd (the tenant) insisted that its own notice then took effect as the trigger for negotiations. 

The section 26 notice had, tactically, been served some time later than the landlord’s section 25 notice and so, if it were the effective notice, the timing of it should have ensured that a lower interim rent would be payable. 

The court was asked to decide:

• whether the section 25 notice was valid or whether the section 26 notice had effect; and  
• what the principal terms of the new lease were to be.

Section 25 notice

The court found that the error in the name stated in the notice was a careless mistake, evidenced also by the notice getting the building address wrong. Previous caselaw, including the authoritative Mannai investment Co v Eagle Star Life Assurance Co Ltd [1997] AC 749, emphasised that the court must focus on how a reasonable recipient in all the circumstances would have understood the notice. In this case, it found that a reasonable recipient would have had no reasonable doubt as to how the section 25 notice was to operate and in respect of which company. 

This meant that the landlord’s section 25 notice was valid and the proceedings continued according to the timing and effect of that notice rather than the tenant’s section 26 notice. 

The new lease terms

The parties disagreed on the principal terms of the renewal:

• the landlord wanted a 12 year term without a break at a rent of £475,000 a year, subject to four yearly upwards-only rent reviews; 
• the tenant sought a five year term with an upwards or downwards rent review and, if the term were to be any longer than five years, a break option in the event that development works to an adjacent building prevented the tenant’s quiet enjoyment. 

In the absence of the parties’ agreement, sections 33-35 of the 1954 Act require the court to decide what lease terms are “reasonable in all the circumstances” having regard to the terms of the current tenancy and  limited to a maximum term of 15 years. 

Section 34 provides that the rent payable under a renewal lease will, in the absence of agreement, be, “determined by the court to be that at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing lessor…”

Using the authoritative guidance on new lease terms from the leading case of O’May v City of London Real Property Co Ltd [1983] 2 AC 726, the court held the terms of the new lease should be as follows:

• A 10 year term: the original term length was 51 years but that was so long as to be of no assistance to the court’s calculation and neither 5 nor 12 year terms were typical in the market. Expert evidence showed several comparable lettings granted with 10 year terms. Accordingly the court held that a 10 year term appropriately and reasonable balanced the interests of landlord and tenant and was consistent with the available evidence;
• Rent: the landlord’s expert evidence was preferred and the court also allowed a three month rent free period for fitting out based on the new open market letting examples adduced. Rent was ordered at £290,062.50 a year and interim rent at the same amount;
  • The approach the parties’ experts took to rent was completely different. The tenant’s expert placed heavy emphasis on the likely impact of the nearby redevelopment works, the prohibition on subletting and the building’s unrefurbished condition. However, the tenant put forward no comparable evidence and the court found its approach failed to take account of the measures likely to be put in place to decrease the impact of the redevelopment works. In contrast, the landlord’s expert made good use of comparables and made suitable adjustments to reflect the actual building in comparison to the other buildings referenced. The figure reached by the landlord and which the court accepted (with a rent free deduction) was more than twice that proposed by the tenant. 
• Upwards or downwards rent review after five years. There was no rent review in the expired lease and there was no doubt that upwards-only reviews were the market norm. However, the court did not read section 34 as giving primacy to market forces and an upwards or downwards review catered for the actual market at the time of review. It was the most inherently fair type of review.  There was no evidence to point towards the likely absence of a willing lessor if the review were to be upwards or downwards;
• No break clause. The court found the insertion of a break clause would be neither reasonable nor appropriate. It reflected that whilst the redevelopment works nearby may have a short term negative impact, redevelopment happens routinely across Central London and measures would undoubtedly be taken to mitigate the impact. A break was incongruent with the terms of the existing tenancy and the proposed grounds for the break (subjective as they were) were an ‘invitation to future litigation’. 

Comment

It is relatively unusual for an unopposed lease renewal to reach trial and so this decision is valuable for the guidance it contains, notwithstanding it to be a county court decision only and so not binding authority for other cases. 

The court’s reasoning demonstrates that it will seek to find a balance between the interests and preferences of a landlord and tenant and that market forces will be an important, but not conclusive, factor in its decision-making. 

This case also demonstrates how simple errors can be compounded by a breakdown in communication. The court found the tenant to have ’overreacted’ to the error in the section 25 notice and to the likely impact of the local redevelopment works. Courts are often at pains to emphasise that litigation is a last resort and so perhaps a lesson to take from this decision is that it’s good to talk’.

Dukeminster Ltd v West End Investments (Cowell Group) Ltd CC (Central London) 21/09/2018