property law - Interim rents

Interim rent
Interim rents are a good illustration of the anomalies. Originally, there was no provision for any increase in rent while a business tenancy was continuing under the 1954 Act. When the right to apply for an interim rent was introduced in 1969, it was given only to the landlord to prevent injustice to landlords in times of inflation. No-one considered that in a property recession, rents might fall below the level payable under the lease, resulting in unfairness to tenants.

Interim rents give scope for strategic manoeuvring. The landlord can only make its application for an interim rent once a section 25 notice has been served by the landlord to terminate a tenancy, or a section 26 request has been made by the tenant requesting a new lease. The interim rent is payable from the later of the date specified in the section 25 notice or section 26 request or the date on which the application for an interim rent was made.

If the tenant plays its cards cleverly by serving a section 26 request before the landlord can serve a section 25 notice, the tenant can specify a date for the start of the tenancy which is 12 months after the date of the notice.

The tenant then has a full year at the historic rental level before the landlord can obtain an interim rent.

Under the Act, the interim rent is to be assessed on the basis of a tenancy from year to year. The court is also to have regard to the rent payable under the current tenancy, which has been interpreted to mean that the court may cushion the impact of the interim rent by tempering the market rent. So there is a double discount for tenants – the cushioning and the valuation on the basis of a tenancy from year to year.

The form of the lease
In setting the other terms of the new lease, the court is to have regard to the terms of the current tenancy and to all relevant circumstances. The circumstances include the operation of the provisions of the Landlord and Tenant (Covenants) Act 1995. So the onus for any change from the terms of the expired lease is on the party seeking the change.

The court will usually not permit a change which is introduced solely to increase the rent payable (by making the lease more tenant friendly) if the tenant opposes the change. Although the court will not 'petrify' the terms of the original lease, there is a clear presumption in favour of continuing the terms of the expired lease. The courts will, however, introduce a rent review clause and there are special provisions dealing with redevelopment break clauses.

The O'May v. City of London Real Property Company case illustrated that the courts will be reluctant to alter the bargain between landlord and tenant in a material way. In the O'May case the court refused to sanction an amendment of the expired lease to incorporate a service charge for the first time. However, there is no general rule preventing the amendment of the lease to introduce a service charge or the updating of the service charge clause. In O'May, the tenant was taking a term of only 5 years and the character of the two parties' interests in the land was such that it was more reasonable for the landlord to retain the risk of repair costs. Had the landlord asked for a service charge which did not transfer the liability for maintenance of the premises, it might have succeeded.

In the recently reported decision of Wallis Fashion Group v. CGU Life Assurance [2000] 27 EG145, the parties faced the need to amend the lease to reflect the 1995 Act. They agreed that amendments were required, but the landlord had requested the inclusion of a provision that, on any assignment, the tenant was to provide an authorised guarantee agreement (AGA). The tenant was only prepared to provide an AGA where it was reasonable. Under the 1995 Act itself, the landlord can only require an authorised guarantee agreement where it is reasonable except where there is an express provision requiring an AGA in all circumstances. The court concluded that it would be inconsistent with the scheme of the Act to order that the lease should include a requirement for an AGA, even where it was not reasonable to call for one.

There may be arguments about the relevance of the Landlord and Tenant Act 1954. But, it gives tenants protection from unnecessary business disruption and from extortionate demands on lease renewal. Tenants should not to give up the protection of the Act lightly.