JD Sports wins a fixed rent: can the court order a turnover rent on the renewal of a business tenancy?

W (No. 3) GP (Nominee A) Ltd & another v JD Sports Fashion plc [2021]

Summary 

This case concerned the business lease renewal of a JD Sports retail unit in a shopping centre in Derby. The renewal lease was agreed for a five-year term with a three-year break clause but the parties could not agree on the new rent payable or the interim rent whilst the proceedings continued.

One of the novel issues before the court was whether it had jurisdiction to order a turnover rent instead of a fixed rent under the provisions of the Landlord and Tenant Act 1954 (the 1954 Act). There was also the question of the impact of the Covid-19 pandemic and how that affected the position on interim rent.

The County Court held that there was jurisdiction to award a turnover rent but declined to do so on this occasion and on these particular facts. The court also awarded a higher interim rent than the new passing rent bearing in mind the changing market conditions.

The facts

JD Sports enjoyed a business lease granted in January 2008 and which expired on 23 June 2017. The lease reserved a base rent of £175,000 plus a turnover rent equivalent to the amount by which the turnover of 8% of gross sales exceeded the base rent.

The parties' original positions and those advanced at trial are set out below.  You will note that they reversed their original approaches.

The parties were, therefore, very far apart in terms of what the open market rent should be in the renewal lease.

The first question before the Court was whether the 1954 Act allowed it to order a turnover rent or whether it was bound to order a fixed rent.

This required an examination of section 34 of the 1954 Act. This effectively provides for the rent to be that which the property “might reasonably be expected to be let in the open market by a willing lessor.” There are also two important disregards (the Disregards) relevant to this case as follows:

• any effect on rent of the fact that the tenant has or his predecessors in title have been in occupation of the holding
• any goodwill attached to the holding by reason of the carrying on thereat of the business of the tenant (whether by him or by a predecessor of his in that business).

The landlord argued that a turnover rent constitutes a rent for the purposes of the 1954 Act and therefore the Court did have jurisdiction. On the other hand, the tenant rejected the proposition that the Court had jurisdiction to determine a turnover rent as it would have to take into account the tenant's actual turnover, the examination of which was not permissible because of the Disregards.

The court also had to consider the amount of interim rent.

The decision

The Judge carefully considered the 1954 Act, case law and various textbooks on the points. The main tension which the Court had to consider was the effect of the Disregards as argued by the tenant.

The Court recognised the difficulty in assessing a turnover rent in all cases. It accepted the position that ordering a turnover rent may be unfair to particular tenants but not others eg  tenants of car parks.

Ultimately, the Court held that if the parties do not agree on whether a turnover went should be awarded, then it needed to assess the facts of the individual case as to whether a turnover rent was appropriate in line with the principles of the 1954 Act.  In other words, the Court did have jurisdiction to grant a turnover rent in appropriate circumstances.

Having reviewed the expert evidence, the Court was unable to agree with the landlord's position of 8% of the turnover equating to £496,000 annually as it took no account of the market trend of decreasing rents and therefore did not represent the open market rent.

The Court also noted that the landlord's original position was to propose a fixed rent of £282,000 which was substantially less than the £496,000 that they were now seeking following the turnover provisions.  For that reason, the Court felt that in the circumstances a turnover rent would not produce an open market rent as required by the 1954 Act and consequentially declined to award a turnover rent in this case.

In assessing the new fixed rent, the Court considered the position at the judgement date in early 2022. The circumstances were that the government was intending to avoid further lockdowns. Having considered the various comparables, the Court held that the rent should be £104,300 a year. This was more than the tenant's position of £17,700 a year but also less than the landlord's position of £170,000 a year for a fixed rent.

Turning now to interim rent, the starting position under the 1954 Act is that this should be payable at the same level as the new tenancy rent awarded by the Court. But, there are two exceptions to that position:

• First, where the rent for the interim period differs substantially from the rent for the new tenancy which may be caused by a change in the market.
• Second, where the terms of the new tenancy result in a substantially different rent compared with the old tenancy. That might apply if the terms of the tenancy are changed.

The parties agreed that the fixed rent would have been higher in 2017 than in 2021 and so the Court held that the first exception applied.   
Having reviewed the comparables, and the experts' submissions, the Court held the interim rent should be £160,300.

Our comment

It is rare for the courts to be asked to set the new rent in a business lease renewal as this is usually negotiated by the parties' experts. However, here there was a fundamental difference in approach resulting in deeply polarised positions which perhaps explains why it reached Court. The Judge herself expressed disappointment that the parties were not able to agree the rent.

The case is useful in reviewing the caselaw on the question of the Court's jurisdiction when assessing the rent and for holding that a turnover rent can be awarded. As a County Court judgement, this is persuasive in future cases but not a binding precedent.