UK Landlord and Tenant: Why an overhaul of the 1954 Act is a risky business

In 2020, the government announced proposals to review the Landlord and Tenant Act 1954. While the Act has remained relatively unscathed since 1954, every now and again there is a swell of cases which return it to the spotlight. Those cases, combined with the current retail climate (the Centre for Retail Research cites 17,000 retail premises as having closed in 2022), demonstrate the market is rife with risk for both parties.

Do inconsistencies in the recent cases support the contention that the Act is overdue an overhaul? The allocation of risk between the parties is central to the issue. 

Shifting risk – terms of the lease

Future pandemic clauses: Retailers are now negotiating these, with some refusing to sign leases without them. Section 35 of the Act dictates that, when making a departure from the original lease, the court is to “have regard to the terms of the current tenancy and to all relevant circumstances” giving it an elastic, discretionary decision-making power.

Should such dramatic provisions be allowed within that power, simply because of the pandemic? Pandemic clauses have been explored in two cases, allowed in one case, but refused in another (WHSmith Retail Holdings Ltd v Commerz Real Investmentgesellschaft MBH [2021] PLSCS 68 and Toplain v Poundland (unreported, Brentford County Court, 7 April 2021). 

Closer examination of the cases reveals no real judicial inconsistency, as the starting point is skewed. In WHSmith, the parties had agreed to the principle (just not the mechanics) whereas in Poundland the landlord was resisting any pandemic clause whatsoever. However, it is the reason for refusal which is interesting.

In Poundland, Jenkins DJ held that the court had taken into account the absence of a pandemic clause in the existing lease, the effects of Covid-19 and lockdown, future lockdowns, and the WHSmith decision. Notwithstanding that, the pandemic provision was refused since “it is not the purpose of the Act to protect or insulate the [tenant]” from commercial risks. In WHSmith, the landlord, by acquiescing to the principle, had agreed – ahead of trial – to the shifting of risk from the original lease. These two decisions cannot be properly described as inconsistent. 

Length of the lease and break options: In HPUT Trustee No 1 Ltd and another v Boots UK Ltd (unreported, Central London County Court, 24 May 2021), HPUT was seeking a 10-year term without a break, and Boots five years with a break at three years. To determine the length of term, the court must consider section 33 of the Act, and what would be “…reasonable in all the circumstances”. To determine a break right, the court must consider section 35 (as above).

On term, the court found for Boots – shorter leases are the market trend post-Brexit/pandemic uncertainty, and a five-year term was reasonable on the evidence.

Regarding the break option, the court again agreed with Boots. While Boots had not produced much evidence to support its need to be nimble, break options are commonplace in the market and the landlord’s position counterintuitively supported what Boots wanted.

HHJ Dight felt that if the market was as optimistic as HPUT held out in its evidence it would be no worse off in terms of letting if Boots later exercised the break and so there was no real shifting of risk to the landlord by allowing the break.

Valuation

Value: The court must consider section 34, the rent at which the holding “might reasonably be expected to be let in the open market by a willing lessor” and take into account various disregards, including previous occupation and goodwill.

Parking the recent debate over valuing rent-free inducements, risk-shifting inconsistencies arise when unique valuation risks and “the hypothetical tenant” collide: Old Street Retail Trustee (Jersey) 1 Ltd v GB Healthcare (18 November, 2022) and W (No 3) GP (Nominee A) Ltd v JD Sports Fashion plc (18 February 2022).

In Old Street the court had to assess what rental adjustment to make for an exclusivity clause preventing the landlord letting to other pharmacies. Such a provision was attractive to the sitting tenant, but HHJ Richards, shackled by the section 34 disregards, was unable to value the provision when assessing rent in terms of the hypothetical tenant. A restriction on dispensing pharmacies might be valueless to another tenant, and section 34(1)(d) therefore prohibits an adjustment. In terms of value, the risk fell wholly to the landlord on renewal.

In JD Sports the existing lease had a turnover rent which, if adopted into the new lease, would make the annual payment far in excess of the market rent. HHJ Fine found that importing a turnover rent sat uneasily with the concept of the hypothetical tenant in a retail context, since its calculation requires an analysis of the tenant’s performance, and the nuance of its business. The result being the turnover exercise could not produce a market rent, and so, on the facts before her, such an arrangement was at odds with section 34 and she refused a turnover rent.

Weighing up the risks

While in non-valuation terms the court has kept firm to not reallocating risk, the JD Sports decision permitted a shifting in risk beyond the original deal in terms of valuation. And, like Old Street, the value attributed to features unique to the tenant were now outside the financial grasp of the landlord on renewal.

One might argue, these valuation-based inconsistencies accord with one purpose of the Act, to protect the sitting tenant against a ransom rent on renewal but at, perhaps, an unfair cost to landlords.

These “blips” can only be addressed via wholesale amendment to the Act, which in itself is an enormous ask. Since only a small percentage of renewals reach court, the real risk is floodgate litigation, as the world of telecoms is experiencing, to clarify new uncertainty, which, in turn, is surely the real deterrent to any overhaul of the Act.

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