Interim payments on renewed leases

Interim rents are not uncommon and will figure in pubs now that numerous leases are coming up for renewal. Ken Newton's column looks at the issues In previous articles I wrote about both Section 25 and 26 Notices being statutory notices served under the Landlord and Tenant Act 1954 to terminate a business tenancy. While in most cases terms are settled between the respective parties, very occasionally it is left for the courts to decide the terms of the new lease. This course of action generally takes considerable time and more often than not extends beyond the expiry date of the lease. It is usually the new rent that is the significant factor and the main area of dispute. Some years ago, the law changed and there was an amendment to the L&T Act 1954 with the introduction of an interim rent. On this issue, I have invited a business colleague, Martin Allen, a solicitor with DMH based in Brighton, to comment on this subject in more detail as follows: A tenant of a pub will generally have security of tenure under the terms of the Landlord and Tenant Act 1954 (unless security has been excluded by a court order). This means that where the period granted by the lease or tenancy agreement (which are different names for the same thing) comes to an end, then, provided the tenant is still carrying on the pub business, the tenancy will continue, by reason of Section 24 of the Act, until terminated in accordance with the terms of the Act (ie, the landlord serves Notice under Section 25 or the tenant serves notice under Section 26). Although such notice can be served up to a year before the end of the lease, it is not uncommon for the renewal process, and hence the lease terms, to continue beyond the expiry date, sometimes for many months, and even years. This would normally give the tenant the advantage of delaying any increase in the rent, until the new lease was actually completed. Interim Rent ­ Introduced by Law of Property Act 1969 to amend L&T Act 1954: In 1969, an amendment to the Act was introduced ­ Section 24A. This entitles a landlord to an "interim rent", payable during the period of the renewal process. However, the landlord has to apply to the court for an interim rent, such application usually being included in the acknowledgement of Service or Answer, although it may be made by a separate application. The interim rent can then be claimed by the landlord from whichever is the later of these dates:

the interim rent application

the expiry of period granted by the existing lease

the expiry of the Section 25 or Section 26 Notice If the landlord omits to apply, there is no right to an interim rent. Also, if neither a Section 25 or Section 26 Notice has been served, then the existing lease continues, at the existing rent. Basis of assessment of Interim Rent The amount of the interim rent is for the court to decide, although in practice it is generally agreed between the respective surveyors as part of the overall agreement of the rent and terms of the new lease. Section 24A says that the interim rent is that which "it would be reasonable for the tenant to pay while the tenancy continues by virtue of Section 24", although it then says that there should be a market valuation under Section 34. The court must also "have regard to" the current rent payable under the existing tenancy. For the purposes of the interim rent valuation, it has to be assumed that the tenancy is "from year to year", rather than for a fixed period. This might sound a slightly technical point, but it is recognised that it will usually produce a lower figure than the rent for a longer fixed period. However, surveyors rarely try to work out the precise difference between a fixed period and "year to year", the lower level of the latter being an element in the general discount that is applied. The way that courts have interpreted Section 24A, in numerous decisions since 1969, has generally been to decide the new lease rent and then to apply a discount. Although surveyors commonly work on the basis of discounts of between 10% and 20%, there are precedents for discounts ranging from zero (this is rare) to more than 50%. Where the period during which the interim rent is payable is very lengthy, the court may, in exceptional circumstances, order a stepped interim rent. An underlying principle of the approach by the courts has been to cushion the tenant from a sudden and very steep increase. In reality, however, as the new lease rent will be a full market rent, the tenant may only be cushioned for a short time! One most important point, particularly for landlords, when deciding whether to apply for an interim rent, is that it may be less than the current rent under the existing tenancy. While the landlord has the right to have the amount fixed by the court at an early stage ­ whereupon it will become payable by the tenant ­ this can involve detailed valuation evidence. Assuming the application was issued at the right time, the interim rent will normally be payable, retrospectively, on completion of the new lease. Quite frequently, particularly with pub lease renewals, there will be agreement for the commencement of the new lease to be backdated, probably to the date of expiry of the old lease. Tenants will often be unaware of Section 24A, and the fact that not only does the landlord have no right to insist on back dating, but that, unless an interim rent application has been made, the old lease rent will continue to be payable until the new lease is completed. The result may be the tenant pays a considerable amount more than he or she is required to pay by law. Note: Some important changes to the 1954 Act are to be introduced later this year. In relation to interim rents, tenants will be given the right to apply (only landlords can do so at present). Also, where the lease is renewed, the interim rent is generally likely to be the new lease rent, without discount.Watch this space for further information! Recommended advice to tenants Interim rents are not uncommon in other commercial property and will figure in public houses now that numerous leases are coming up for renewal. There has been rental growth in recent years and landlords are looking for significant increases especially those in prime high-street locations, although this can and has been the downfall of some pub operators. With rent reviews the lease usually provides that interest will be charged on rent arrears to include an increased rent resulting from a review and it will of course be backdated to the relevant review date. However, with a lease renewal and where a tenant tries to use delaying tactics to his advantage, I fully expect landlords of brewers and pub companies to make interim rent applications and tenants must be aware and take appropriate professional advice. kennewton@innconsultation.co.uk