1954 Act Consultation – interim rent

When a tenant with security of tenure remains in occupation after the contractual expiry date of its lease, it has a “continuation tenancy” or is described as “holding over”. During the continuation tenancy, it continues to pay the passing rent. 

The process of entering into a renewal lease or recovering possession of the property cannot legally start until a section 25 or section 26 notice has been served to terminate such a tenancy. 

Either the landlord or the tenant may apply to the court to determine an interim rent that should be paid for the period from the earliest termination date that could be stated in the section 25 or section 26 notice and either (i) completion of the renewal lease or (ii) termination of the continuation tenancy where there is no renewal. If the interim rent is assessed as being higher than the passing rent, the tenant will have to pay the landlord the difference owed and, conversely, if it is lower than the passing rent, the tenant will be entitled to a refund from the landlord. 

Interim rent is usually dealt with on completion of the renewal lease, or termination where there is no renewal. 

In terms of what is an appropriate amount of interim rent, the 1954 Act provides for different valuation circumstances. In most cases, where the tenant renews its lease of the whole of the property in the old tenancy, the parties agree that the interim rent will be the same as the new rent (the valuation date for which is effectively the date of the trial). 

However, the 1954 Act provides that the interim rent can be based on a different valuation date and method of valuation where:

1. rental values have changed substantially during the interim rent period;
2. the terms of the renewal lease differ from the existing lease; or
3. the tenant does not renew. 

These different scenarios add a layer of complexity. 

The Law Commission is exploring whether the assessment of interim rent should be streamlined and has suggested two alternative options. 

Option A

Under Option A, there would be no interim rent on a renewal. The valuation date and commencement date for the renewal tenancy could be the 6-month expiry date in the section 25 or 26 notice, or such later date as the notice specifies. This has strategic implications relating to timing of notices/notice periods (and these strategic considerations had previously been removed as part of the 2003 reforms). 

The Commission proposes that, if Option A is taken forward, the rent should nonetheless be adjusted where there are significant differences in the rent between the existing tenancy and the renewal tenancy because the demise or other terms are different. 

Where there is no renewal, Option A proposes that the interim rent should be an open market rent for a hypothetical tenancy. This may exclude any rent-free fitting out period, if this ends up being the approach for renewal leases (see our previous post here) and identifies three possible alternatives for the duration of the hypothetical tenancy, namely:

1. the actual duration of the continuation tenancy;
2. the duration that would have been granted had a renewal lease completed; or
3. a yearly tenancy of fitted out premises. 

Option B

Option B would retain the current system but with only one basis of assessment: a hypothetical tenancy on the same terms as the continuation tenancy.  Again, assuming a disregard for a rent-free fit out, there are three options for the length of the hypothetical tenancy: 

1. the actual duration of the continuation tenancy;
2. the duration of the renewal tenancy granted or that would have been granted if a renewal lease is not actually entered into (because the tenant decides not to renew or the landlord successfully opposes renewal); or
3. a yearly tenancy, assuming the premises are already fitted out. 

The Law Commission also considers how interim rent should operate under the two options in the following circumstances.  

Rack rent to turnover rent

Option A – In this scenario, there is effectively no interim rent as the renewal tenancy would commence on a fixed valuation date.  However, backdating a new rental model may be difficult because of the lack of relevant trading data. If so, the court would be given the power to adjust the provisions of the new tenancy so that the turnover rent becomes effective on a future date (part way through the renewal tenancy) with rack rent payable up to that point. 

Option B – the interim rent would be assessed on the same rental model as the original tenancy. 

No renewal 

Under both proposed models, where there is no renewal, the suggestion is that the rent should continue to be assessed using the same rental structure as the original lease (which, for example, might be a turnover model). 

The Commission seeks views on two more issues:

1. Should parties should be able to apply for adjustments to rent during a continuation tenancy, rather than having to wait for the renewal process to be completed?  They comment that the practical implications of any such process may outweigh the potential benefits.
2. Should interim rent balancing payments be recoverable as judgment debts or rent payable under the lease?