Unopposed lease renewals - how does the Court decide terms?

The recent County Court case of Dukeminster Limited v Westend Investments (Cowell Group) Limited has provided guidance in relation to what is likely to happen if your section 25 Notice contains a mistake and also on the question of how the Court will determine lease renewal terms on an unopposed lease renewal.

In the Dukeminster case, Dukeminster UG was the tenant of premises in Mayfair under a lease which was granted in 1967 and which expired in 2016. Dukeminster UG’s parent company was the similarly named Dukeminster.

Following the expiry of the lease, the landlord served a section 25 Notice but addressed the notice to Dukeminster (the parent company) rather than to the actual tenant, Dukeminster UG.

Litigation then ensued and the tenant argued that the section 25 was invalid because it failed to specify the correct tenant.

The tenant argued that a reasonable recipient of the notice would be confused as to whether the notice was intended to be addressed to the tenant’s parent company or to the tenant. 

The Court rejected this argument. In the Court’s view, what had happened was very simple, namely that:-

• the landlord’s solicitor had made a mistake;
• clearly, the notice was intended to be addressed to the tenant not to the parent company; and
• any reasonable recipient would have understood that the notice was directed to the tenant.

The Court therefore ruled (no doubt to audible sighs of relief from the landlord’s solicitors) that the notice was indeed valid.

The Court then went onto consider what the terms of the renewal lease should be. 

Sections 33-35 of the Landlord and Tenant Act 1954 require the Court to decide what 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.

The renewal terms were decided as follows:-

Contractual Term

The tenant was seeking a 5 year term.  The landlord was seeking a 12 year term.  The Court granted a 10 year term.  The Court rejected the tenant’s argument that because of the recent death of its chairman, it should be allowed some flexibility as its longer term plans were unclear.  The Court found that this fact had little weight.  The Court proceeded to rule that the market norm was a 10 year term and that there was no good reason to depart from that.

Rent Review

The tenant was seeking an upwards/downwards review after 5 years.  The landlord was seeking an upwards only review after 5 years.  There was no review clause in the existing lease.  Although the Court accepted that normal commercial practice might be for an upwards only review, it chose to ignore the commercial practice and to rule that an upwards/downwards review clause should be awarded in this case as this was “inherently fair”.

Break Clause

The landlord was arguing for no break clause.  The tenant was seeking the right to break after 5 years if the premises became unusable as a result of neighbouring redevelopment works. The Court took the view that the chances of the neighbouring redevelopment works becoming so disruptive as to render the premises unusable was speculative.  Accordingly, there was no justification for the break clause sought by the tenant.

Rent

The landlord was seeking £297,500 per annum. The tenant was seeking £126,500 per annum.  The tenants’ expert placed heavy emphasis on the likely impact of the neighbouring redevelopment works.  However, he put forward no comparable evidence.  In contrast, the landlord’s expert made good use of comparables.  The Court was unimpressed by the tenant’s expert and called his approach “impressionism close to pure guess work”.    The rent was therefore assessed at the figure sought by the landlord (with a slight discount). 

Conclusion

The case is a reminder for both landlords and tenants that seemingly significant errors in Notices do not necessarily invalidate a Notice.  The test of how a “reasonable recipient” would have understood the Notice remains a valid test. It is a test that parties should consider carefully before they either wave the white flag (if they are the party who has served a Notice containing a mistake) or before trying to gain some tactical advantage from the mistake (if they are the recipient of a Notice containing a mistake).

The case confirms that the Court will, wherever possible, seek to find a balance between the interests and preferences of a landlord and tenant.  What is conspicuous is the willingness of the Court to impose an upwards/downwards rent review clause in the face of evidence that this was not current market practice.  This will be eagerly seized upon by tenants in a similar position.

For any questions concerning the service of notices or lease renewals, please contact Andrew Turner on 01242 586841.