Business Tenancies: Valuation of rent during Covid-19 pandemic (S Franses Ltd v The Cavendish Hotel (London) Ltd – 2021)

In a further case arising out of the unique challenges posed by the Covid-19 pandemic, this decision considers the impact of the pandemic on the assessment and valuation of commercial rents for new lettings.

The background

In S Franses Ltd v The Cavendish Hotel (London) Ltd [2021], the tenant held two leases of ground floor and basement premises from which it ran a business specialising in antique art and textiles. The local art district of London enjoys planning protections which preserve and enhance the character of the area.

The landlord had opposed a renewal of the leases on the grounds of redevelopment, which the Supreme Court had ruled against, finding that the landlord’s proposed works were intended to remove the tenant from occupation and were not works proposed to be undertaken otherwise. The tenant’s application for new tenancies was made during the Covid-19 pandemic, which has had a sizeable impact on commercial rents as a result of enforced closures, working from home, and social distancing requirements. Turnover rents are now preferred, rather than previous ‘zoning’ valuation models.

The decision

The County Court considered valuations from both the landlord and tenant experts. The tenant’s expert did not place sufficient emphasis on completed transactions, whilst the landlord’s expert had not taken a sufficiently impartial view; however, both experts faced the challenge of valuation affected by the pandemic and with no comparable valuations to provide a steer.

The County Court judge used a zoning valuation model using a Zone A rent and made adjustments and discounts to account for the niche premises and area character. In deciding the interim rent, the court considered:

1. The rent for a year-to-year tenancy from 3 January 2016, referencing the tenant’s valuer’s evidence (£140,650 pa);

2. Rent payable under the current tenancies (£220,000 pa); and

3. The rent it was reasonable for the tenant to pay.

The court determined that a reasonable rent sat in between both figures, arriving at an interim rent of £160,000.

Advice and action

It is inevitable that, in many cases, commercial rents will be adversely impacted by the pandemic. In this case, the new rents are substantially lower than previously, resulting in a sizeable drop in income for the landlord.

With a lack of comparables, the valuers’ evidence in this case was important and found to be lacking in objective viewpoint. The court was required to determine what was a reasonable sum for the tenant to pay as interim rent, and this decision highlights that a number of factors may be considered here beyond simply a determination as to the rent payable under a new tenancy.