Interim Rent – Q&A from RICS Property Journal

Posted by Jeremy Ferris

Partner

Article first published in RICS Property Journal May-June 2016

QUESTION

In 2009 my client took a five-year lease of retail premises protected by the Landlord and Tenant Act 1954 (“the Act”).  In 2014, she served a formal request for a new tenancy under section 26 of the Act. Since then, the landlord has been evasive and negotiations have dragged on for two years. Rents declined significantly over the term of the lease but have now picked up. My client  wonders whether the interim rent can be backdated to be set at the lower level?

ANSWER

It is well known that a tenancy protected by the Act will continue unless either the tenant vacates before the end date on the lease, or the lease is brought to an end by the landlord or tenant serving an appropriate notice under the Act.

With negotiations for a new tenancy ongoing, a tenant will usually continue to pay rent at the level that applied at the end of the contractual term. That rent may have been settled some time ago and may therefore be above or below current open market levels. In those circumstances, either the landlord or the tenant can apply to a court asking it to set an interim rent.

Once an application to a court has been made, that court has discretion as to whether an interim rent will be payable and, if so, at what level.

Procedure

Although either party can apply for an order determining an interim rent, only one application may be made at a time. This can be made either as a discrete application as part of the lease renewal process or as a stand-alone claim. Applications cannot be made any later than six months after termination of the relevant tenancy.

When will an interim rent begin?

An interim rent is payable from the earliest date on which the tenancy could have been brought to an end by the relevant section 25 notice, or on which the tenant could have given in their section 26 notice for commencement of the new tenancy. This does not mean the earliest date that could have been specified in any such notice, since that date would always be the contractual expiry date. The correct approach is to examine the actual notice or request, and calculate the earliest termination date that could have been specified in that notice or request.

Determination

There are two different methods for calculating the amount of interim rent, according to whether  the new tenancy will be for the whole of the premises (and the landlord is not opposed to granting it) or whether it is any other case.

In the this case, as the new lease is to be for the whole premises and the landlord does not object to a new tenancy, the first method of calculation will apply. The general rule will therefore be that the interim rent is the same as the rent payable under the new tenancy; therefore if the ‘new’ rent is lower or higher than the existing level, the interim rent will also be lower or higher.
There are however two exceptions to this general rule: first, where there has been a substantial change in the rental market during the interim rent period; and second where the terms of the renewal lease are significantly different from those in the old one. In both those cases, the person making the application must prove to the court’s satisfaction that these factors would cause a substantial difference in the interim rent. They ask the court to settle the interim rent accordingly.

Applying those principles to this case, my advice is that the tenant should apply to a court for assessment of an interim rent. The application will be on the basis that the general rule for assessment of interim rent should not apply, because rental levels have substantially altered during that interim period. If the court agrees, the interim rent will be valued and run from the commencement of the interim rent period.

For further information contact Partner, Jeremy Ferris, on 01227 763939.


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