A solution to the inducement conundrum

Is it right to discount rent on business tenancy renewals to compensate for the lack of a rent-free period? For many years, we all got on perfectly well with rental valuations on business tenancy renewals under section 34 of the Landlord and Tenant Act 1954 (the 1954 Act). Not that valuers were inclined to agree with each other, of course – but they did at least know what their valuation parameters were. All that changed a few years ago when some bright spark argued that the rent should be determined on the basis that the rent must be discounted to allow for the absence in the statutory formula of a rent-free fitting-out inducement. If such inducements were readily granted in the market, but were unavailable under the statutory formula, then should not the tenant be compensated by having its rent reduced commensurately? This appears hard to controvert, at first sight – and indeed, tenants arguing it started to get away with it, in a series of county court decisions. Then along came a decision of the High Court – Humber Oil Terminals Trustee Ltd v Associated British Ports [2012] EWHC 1336; [2012] L&TR 28 – in which Sales J determined that an interim rent should be reduced, using similar reasoning.  This same point can crop up in rent review too, of course, but at least there the parties have the option in entering into their bargain to draft their way around the problem (for example, by providing an assumption that a fitting-out rent-free period has already been enjoyed). In the statutory context, parties are stuck with what section 34 says. The outcome seems unfair: in the real world, the tenant does not actually move out, and so does not need a rent-free fitting-out period, because it is already trading from fitted-out premises (for which, note, it may well have received an inducement in the first place). So why should it then have its rent reduced to reflect the absence of something which it would not be entitled to receive in the first place? Here is a suggested solution. The way we were First, a quick tour around how we got into this situation. In New Zealand Government Property Corporation v HM&S Ltd [1982] QB 1145, a tenant had fitted out a theatre with some seating. Its tenancy was renewed by agreement. On review of the rent payable, the landlord argued that the seating should form part of the premises to be valued, on the footing that because the tenant had understandably not removed it before the grant of the new tenancy, it had ceased to be a tenant’s fixture. Unsurprisingly, the landlord lost this unmeritorious argument, and the premises were valued without reference to the seating. Now here comes the non-sequitur. New Zealand is commonly cited as authority for the proposition that on a hypothetical letting with vacant possession, the premises are to be valued on the assumption that the actual tenant has vacated the premises, taking with it all that it was entitled to remove.  But that does not follow – at least not in the statutory renewal context. Whatever may be the position on review (and it is worth stressing that New Zealand concerned a rent review and not a renewal), it cannot be said that the premises should be valued on the same basis under section 34. The reasoning is straightforward. Section 34 requires a valuation of the holding. Assuming that that valuation is to be with vacant possession (although section 34 does not expressly say that), is it right to assume that the holding is free of tenant’s fixtures? In short, no. The holding is the part of the premises occupied by the tenant – fixtures and all. There is no direction in section 34 to assume that the actual tenant has stripped out its fixtures, and such an assumption is not implicit.  New Zealand itself does not support the proposition that the fixtures are assumed to be absent either. To the contrary, when Lord Denning MR addressed the point in the context of the 1954 Act, all he said was that the rent should be assessed on the basis that the tenant would have a right to remove its fixtures. But a right to remove is not the same thing as an assumption that the right has been exercised. Indeed, it is inconsistent with it. Admittedly, Lord Denning went on say that the fixtures should not be regarded as part of the premises for the purpose of fixing the rent – but he was there referring to the result compelled by the rent review provisions in that case, rather than the section 34 formula. When Sales J came to consider the point, he concluded that Lord Denning had been expressing a principle of equal application to section 34 – but, with respect, that is not right. The way we are So where does all this leave us? First, the argument that section 34 requires a valuation of premises without fixtures is surely wrong. Fixtures form part of the holding, and must be valued, albeit subject to a right to the tenant to remove them if it so chooses. Secondly, the fact that the fixtures must be valued is not necessarily something that is always beneficial to the landlord. Some tenants will wish to argue that the fixtures are outdated, or bespoke, and that the hypothetical tenant would wish to replace them with a fit-out that is more suitable. Such arguments may carry weight – although they are only arguments that take place against the background of the actual tenant finding them good enough for its purposes. Thirdly, section 34 directs a disregard of the effect on rent of improvements in certain circumstances. It should be stressed that this supports, rather than conflicts with, the point made about valuing the fixtures in situ. The right approach is to take the premises as they stand, and then to apply the appropriate disregards to the rent payable in respect of those premises. Guy Fetherstonhaugh QC is a barrister at Falcon Chambers