07 Dec 2018

The recent County Court Case of Dukeminster Limited –v- West End Investments (Cowell Group) Limited has provided everyone involved with 1954 Act lease renewals with further interesting guidance on the workings of the Act.

The first part of the judgment sheds further light on circumstances under which errors in 1954 Act notices will affect their validity. By contrast, the second part of the judgment provides an illustration as to how the Court deals with key terms in a renewal lease, including length of the new term, break rights, rent review and the new rent itself.

The defective Section 25 Notice

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.

Upon expiry of the lease, the landlord served a Section 25 Notice, but its solicitors addressed that notice to Dukeminster, not the actual tenant Dukeminster UG. Alleging that this Section 25 notice was invalid because of the name discrepancy, the tenant's solicitors served a Section 26 request stipulating a later expiry date than the Section 25 notice. This was to seek to take advantage of a later start time for the tenant's liability for interim rent.

The first issue that the Court had to deal with, therefore, was whether the discrepancy in the Section 25 notice invalidated it. Only if it did could the tenant avail itself of the later Section 26 Request and the interim rent advantages that it gave.

The Court focused on the well-known "Mannai" test that is applied when considering errors in notices, namely how a "reasonable recipient" would have understood the notice.

The tenant argued that, for convoluted tactical reasons, the landlord may have deliberately addressed the notice to the parent company not the actual tenant knowing that it would be invalid. Thus, the tenant argued, a reasonable recipient would be confused as to whether the notice was intended to be addressed to the actual tenant or not, so it could not be valid.

The Court did not accept this over-intricate argument. In the Court's view, what had happened was plain, namely

  • the landlord's solicitor had made a mistake 
  • clearly, the notice was intended to be addressed to the tenant not the parent company, and
  • any reasonable recipient would have understood it in this way.

Accordingly, the notice was valid notwithstanding the fact that it was addressed to the tenant's parent company not the tenant.

Discussion of renewal terms

The Court then went on to consider what the terms of the renewal lease should be. A summary of the salient points made is below. As a general point, the Court reiterated the well-known O'May guidance (that the starting point for considering the renewal lease terms is the terms of the existing lease), but reiterated that that did not mean that the new terms had to be the same as the old terms and that if there was good reason to change those terms, then the Court could order that change.

Term of Lease

  • Tenant's position: 5 years
  • Landlords' position: 12 years
  • Court's decision:10 years

The tenant wished for flexibility as its longer term plans were unclear following the recent death of its chairman. The Court however found that that fact had little weight; the market norm was 10 years and there was no good reason to depart from that, the existing lease's term of 51 years being irrelevant because a maximum of only 15 years can be awarded under the Act.

Rent Review clause

  • Tenant's position: Upwards/downwards after 5 years.
  • Landlord's position: Upwards only after 5 years
  • Court's decision: There was no review clause in the existing lease. Whilst the Court accepted that normal commercial practice might be for an upwards only review, that did not mean that imposing such was in this case necessarily fair. The Court concluded that because such was "inherently fair" there should be an upwards/downwards review clause.

Break Clause

  • Landlord's position: No break clause
  • Tenant's position: Break right after 5 years if the premises became unusable as a result of neighbouring redevelopment work.
  • Court's decision: The tenant argued that it was well known that the neighbouring American Embassy was to be subject to a substantial renovation project over the coming years which might make it impossible to occupy the premises thus justifying a break right, if that occurred. However, the Court felt that the chances of the re-development works being so disruptive so as to render the premises unusable was speculative and the tenant's rights could be adequately protected under the Party Wall Act etc. Thus there was no justification for a tenant's break right after 5 years.

Rent

  • Landlord's position: £297,500 per annum
  • Tenant's position: £126,500 per annum
  • Court's decision: The Court was unimpressed by the tenant's expert valuer, whose evidence was that the premises was effectively unlettable (because of the potential re-development next door) save on very advantageous terms. The tenant's valuer was unable to provide comparable evidence of such an allegedly unlettable property and thus relied upon a series of subjective discounts to reach his figure. The Court was unimpressed by this approach calling it "impressionism close to pure guesswork". Instead the Court preferred almost entirely the landlord's valuer's approach reliant on a number of comparable lettings and denying any suggestion that the premises (in Mayfair) were effectively unlettable. Rent was thus assessed at the figure contended for by the landlord, slightly discounted so as to amortise the effect of all the rent-free periods in the comparables.

Interim Rent

The Court saw no reason to depart from the standard interim rent position upon an unopposed lease renewal, namely that the interim rent should be the same as the new rent.

Conclusion

This case is a reminder that seemingly quite significant errors in a 1954 Act Notice (in this case the wrong tenant was named) do not necessarily invalidate the notice. Indeed, taking such a point might result in expensive and unsuccessful litigation and an eventual adverse costs order.

The renewal terms set by a Court under the 1954 Act will always depend upon the particular circumstances of the case and the relevant rental market. That said, the willingness of the Court to impose an upwards/downstairs review catches the eye as being against standard market practice and may be eagerly seized on by tenants in a similar position.

However, this is only a County Court case and is thus not binding on any other Court which would be free to reach its own view on renewal terms, including the rent review clause.