Suitable Terms For Commercial Lease Renewals Under The Landlord & Tenant Act

The decision in Iceland Foods Ltd v Castlebrook Holdings [2014] PLSCS 95 (CC) demonstrates the approach of the Court in determining suitable terms for commercial lease renewals under the Landlord and Tenant Act 1954 (the "Act").

The facts

Iceland Foods Ltd ("Iceland") held the assigned lease of a high street retail unit in Sandbach. The unit comprised almost 10,000 square feet, divided over the ground and first floor - the latter of limited use to Iceland. The assigned lease expired in December 2011 so in anticipation, in January 2011, Iceland served a s.26 Notice to continue in occupation. The freeholder served a counter-notice not opposing the grant. However, shortly afterwards, Castlebrook Holdings ("Castlebrook") acquired the reversionary interest from the freeholder.

In a Part 8 Claim, Iceland reiterated its proposal for the new Lease terms: a five year term; the passing rent of GBP 37,500 pa; and otherwise identical terms to its previous Lease, subject to usual modernisation provisions.

Castlebrook did not oppose the renewal. However, it counter-proposed with the following changes: a fifteen year term; a starting rate of GBP 182,350 pa; and five year rent reviews.

Renewal term

At trial, Iceland argued that it operated in a competitive industry. Market volatility and underperformance meant that long-term commitments were too inflexible for its business. Castlebrook asserted that fifteen years was the standard term in modern leases.

The Judge looked to s.33 of the Act:

"...determined by the court to be reasonable in all the circumstances...not exceeding [fifteen] years..."

and highlighted its lack of reference to market conditions. The Court resolved to balance the interests of the landlord and tenant in light of this. The Judge deliberated on the declining profits produced from the unit, despite Iceland as a whole self-publicising its success through the recession, Iceland's occupation of the premises for over twenty years of the original 35 year lease and the individual policies of the parties.

A ten year term was found reasonable in honouring the primary purpose of the Act - protecting the carrying on of tenants' businesses. It would encourage capital expenditure but would not diminish the value of Castlebrook's reversionary interest. The internal...