Nyree Applegarth, Head of Property Disputes, takes a look at a significant Court case around turnover rent when a lease is being renewed.
Prior to the pandemic, cases on lease renewal terms were few and far between. As I’ve commented before, that’s all changed and the amount of new rent payable on lease renewal has now become a very hot topic.
Recently a County Court has had to look at the issue of whether it can award a turnover rent on a lease renewal application. In the case of W(No.3) GP(Nominee A)Ltd v JD Sports, JD Sports had taken a lease in 2007 for 10 years at an initial base rent of £175,000 per year with a turnover rent representing the amount by which 8% of the turnover exceeded the base rent.
The landlords were seeking the imposition of a turnover rent in the lease renewal proceedings. JD Sports sought a low fixed annual rent whilst the landlord was asking for a turnover rent of 8% of turnover, which would have meant a rent of £496,000 based on an estimate of turnover for 2021/2022.
The tenant sought to argue that if the Court was minded to order a turnover rent then the percentage should be much lower at 0.29%. After a four-day trial, the Judge at Nottingham County Court decided that it would not order turnover rent and instead fixed the annual rent at £104,300, relying on evidence of 40 comparables that were submitted to the Court by the experts.
The Judge commented that ordering a turnover rent did not fit easily into the way in which the Court was required to set an open market rent under Section 34 of the Landlord and Tenant Act 1954 and, in particular, the way in which the statutory disregards under Section 34 were to operate.
Section 34(1)(b) required the Court to disregard any goodwill that was attached to the premises by reason of the tenants business. If you were to factor in an element of turnover then that involved taking some account of the business and the goodwill and the Judge did not think that that was consistent with the disregard.
The Judge also commented that he didn’t think that clauses imposing turnover rents were “other terms” of the tenancy that he could deal with under Section 35 of the Act. Ultimately, the decision was taken to order the rent to be a fixed rental under the new lease despite the fact that the original lease had included an element of turnover rent.
This is an interesting decision because post March 2020 turnover rents had been on the increase but there had always been a question mark over whether or not a Court could order the inclusion of turnover rents in a lease renewal application.
Based on this decision, it appears that there is little appetite to order a turnover rent when a lease is being renewed.
