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Case No: A01ED746

A01ED747

A01ED748

IN THE COUNTY COURT

SITTING AT CENTRAL LONDON

Thomas More Building, Royal Courts of Justice, Strand, London WC2 2LLt

Date: 11/03/2016

Before:

HH Judge John Mitchell

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Between:

BRITEL FUND TRUSTEES LIMITED Claimant

- and -

B&Q PLC Defendant

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Emily Windsor (instructed by Berwin Leighton Paisner LLP) for the Claimant

Nathaniel Duckworth (instructed by Bond Dickinson LLP) for the Defendant

Hearing dates: 9th and 10

th November 2015

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JUDGMENT

County Court Judgment Britel Fund v B&Q Plc

Draft 18 March 2016 18:59

HHJ John Mitchell:

1 In these proceedings under Part II of the Landlord and Tenant Act 1954 the Claimant

landlord applies for the grant of a new tenancy of Unit 10, Tottenham Hale Retail

Park, Tottenham (‘the premises’) to the Defendant tenant which is nationally known

warehouse retailer. It also applies for interim rent. It has been agreed that the lease

will be for a term of ten years which is standard for the retail warehouse business with

mutual rolling break clauses which permit both landlord and tenant to terminate the

lease at any time after the 30th

June 2018. All the other terms have been agreed save

for the annual rent and the interim rent which, it is agreed should be the same as the

annual rent before any adjustment to the latter is made to reflect the existemce of the

break clause.. The Claimant, supported by its expert surveyor, Mr Gwyn Jones

FRICS proposes an annual rent of £698,500 (representing a value of £18.90 per sq

foot) whereas the Defendant, supported by its valuer, Mr John Bath FRICS argues for

£281,000 (or £7.60 psf).

THE PREMISES

2 The premises comprise an approximately 37,000 sq ft purpose built retail DIY

warehouse with a larger depth than frontage. Although the unit has rear access to the

premises for the delivery of goods this is shared with other retailers. There is

customer car parking at the side and front of the store.

3 The premises are situated in the Tottenham Hale Retail Park at the intersection of two

A roads and some 4 miles north of central London. Other tenants include Curry’s, PC

World, Argos, Poundworld, Asda Living, Lidl, Staples, Carpetright, Halfords, JD

Sports, and Boots. None of the other three main DIY retailers (Homebase, Wickes and

the Range) have premises there. With the exception of Carpetright these stores differ

County Court Judgment Britel Fund v B&Q PLC

from B&Q because all if not all of their customers will take their purchases away with

them. The majority of Carpetright customers will have the goods delivered. B&Q

falls between the two groups.

4 Although the Defendant holds the premises under three leases the lease of the main

retail unit was granted in 1990 and for the purpose of this litigation the three tenancies

have been treated as one. The leases provide for ‘upwards only’ rent reviews at five

yearly intervals. The annual passing rent is £776,139 or £20 psf. and is the product of

a rent review undertaken in 2004. The 2009 review was determined at an arbitration

in 2011 in which the arbitrator found that the then market rent was £650,000 or

£20psf. As a result of the ‘upwards only’ clause the rent therefore remained at £21psf.

5 The Defendant accepts that the lessor has plans to redevelop the site, has already

obtained outline planning permission and is likely to proceed with the redevelopment.

Accordingly the parties have agreed a mutual break-clause exercisable on six months

notice on or after the 30th

June 2018. Both parties agree that the break-clause will

have a depreciatory effect on the rent payable under the new lease.

THE APPLICABLE LAW

6 The applicable law is agreed. The relevant part of section 34 of the 1954 Act provides

that:

‘(1) The rent payable under a tenancy granted by order of the court under

this Part of this Act shall be such as may be agreed between the landlord

and the tenant or as, in default of such agreement, may be determined by

the court to be that at which, having regard to the terms of the tenancy


(other than those relating to rent), the holding might reasonably be expected

to be let in the open market by a willing lessor, there being disregarded—

(a) any effect on rent of the fact that the tenant has or his

predecessors in title have been in occupation of the holding,

(b) 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),

(c) any effect on rent of an improvement to which this paragraph

applies,

(d) …

(2) Paragraph (c) of the foregoing subsection applies to any improvement

carried out by a person who at the time it was carried out was the tenant, but

only if it was carried out otherwise than in pursuance of an obligation to his

immediate landlord and either it was carried out during the current tenancy

or the following conditions are satisfied, that is to say,

(a) that it was completed not more than twenty-one years before the

application for the new tenancy was made; and

(b) that the holding or any part of it affected by the improvement

has at all times since the completion of the improvement been

comprised in tenancies of the description specified in section

23(1) of this Act; and


(c) that at the termination of each of those tenancies the tenant did

not quit.

(3) Where the rent is determined by the court the court may, if it thinks fit,

further determine that the terms of the tenancy shall include such provision

for varying the rent as may be specified in the determination.’

THE ISSUES

7 The parties agree that there are two main issues.

i) Should allowance be made for a three month so called ‘rental holiday’?

ii) What is the open market rent for the lease with its break clause?

However the second issue involves significant difficulties in establishing a market rent.

8 The parties disagree as to whether the court can properly allow a ‘rent holiday’ to take

of the fact that in what Mr Duckworth for the Defendant terms ‘real world

transactions’ an incoming tenant will generally receive a three month rent holiday to

reflect the cost and time in fitting out premises before trading can commence. On this

issue there are conflicting County Court decisions, the more recent ones being in

favour of a holiday discount.

9 The second issue is complicated because of the break-clause. Sub-section 31 (4) is

based on the assumption that there is an open market rent for the subject premises.

This assumption is itself based on an assumption that there exists a prospective lessee

who is not already in occupation and who would be willing to take the lease at that

rent. The negotiations proceeded on the basis that the assumptions were satisfied and

it was agreed that the likely tenant could be taken to be one of the main DIY


warehouse retailers. Accordingly the agreed approach (‘the original approach’) was

that the open market rent for a ten year lease to a DIY retailer without the break

clause should be ascertained (‘the first stage’) and this should then be discounted to

take account of the break clause (‘the second stage’).

10 Mr Jones contended for a discount of not more than 10% whereas Mr Bath argued for

one of 50%. This continued to be the position until the second day of the hearing. At

that point both valuers conceded that the exercise of establishing a market rent was

inherently artificial because no DIY retailer would accept a lease with such a break

clause. In cross-examination Mr Jones conceded that the only potential tenant for a

lease which included the break clause would be a discounter- someone who trades

goods at a discount- who would be willing to trade for a short term and who would

carry out a ‘quick, cheap and dirty’ fitting out/stripping out. The problem is that

coming so late in the legal process no proper comparables were produced for such a

letting even if they exist.

11 Mr Duckworth for the tenant argues that the court should adopt the approach

previously agreed but substituting a discounter for a DIY retailer. The market rent for

a ten year lease should be discounted by the amount that would be required for the

same discounter to take a lease which included the break clause. Alternatively the

Court should adopt the original approach. I agree with his argument that what was

important was that if the first stage involved a DIY retailer, the same assumption

should be made at the second stage. It would be illogical and wrong to treat the

prospective tenant as a DIY retailer at the first stage and apply the discount

appropriate for a discounter at the second stage.


12 Ms Windsor for the lessor argues that the original approach is still valid and that

compensation for the effect of the break clause can properly be made at the second

stage.

13 Mr Duckworth’s argument makes logical sense. However, as I have said no proper

comparables for a discounter have been produced. Both valuers were very frank about

the difficulty and I hope they will not feel offended if I say that I gained the

impression they were both making guesses based largely on their considerable

experience.

14 In such uncharted waters I have decided that the safest approach would be to adopt

the two stage approach first for a DIY retailer and then for a discounter before

comparing the two results. I warn myself that the discount rate at stage two may be

different for both types of trader and that care has to be taken when considering a

lease to a discounter not to ‘double count’ at stages one and two.

THE EXPERTS

15 Both experts have many years of experience and in my judgment there is little to

choose between them by way of expertise. The evidence of both suffered from the

fact that they were not truly independent and impartial experts as CPR 35.2 requires

and in their own way were as much advocates for their parties’ cause as Ms Windsor

and Mr Duckworth. An uniformed reader of any one report could quickly and without

difficulty identify the party who had instructed the writer. For example, Mr Bath for

the tenant pointed out every possible defect of the premises and the retail park. On the

other hand Mr Jones considered the rent for the subject premises would be higher than

for the open market rents of three comparables which are at least the same and

probably more attractive sites. For both experts their favourite geese are swans and


their opponent’s swans, ducks. I do not say this as a pejorative criticism nor do I

criticize their good faith. Such deficits are perhaps inevitable when experts regularly

act for their clients and are involved long before the trial as negotiators for the terms

of the lease but they do make the task of the judge more difficult.

16 In some matters though their evidence was obviously that of two experienced

surveyors discussing the premises in an impartial manner, most noticeably when they

spontaneously agreed that away from the artificial context of Part II no DIY retailer

would take a lease of the premises because of the landlord’s redevelopment plans .

ISSUE ONE SHOULD ALLOWANCE BE MADE FOR A THREE MONTH

SO CALLED ‘RENTAL HOLIDAY’?

17 In Max Mara v Pearl Assurance ((1996) unreported) HHJ Sir Frank White held that

rents should not be devalued to provide for a three month fitting out rental holiday.

‘In my judgement the [landlords] rightly stress that if a tenant who becomes

entitled to a lease renewal under the 1954 Act is to have, however the

calculation is done, a notional rent free allowance as if he was again being

compensated for the rental cost of fitting out when no such burden is being

incurred he will receive an unwarranted windfall at the expense of the

landlord... In my judgement the court should be reluctant to interpret the section

in a way which involves a departure from reality with the importation of a

fiction into the determination of an open market rent unless the wording

unambiguously requires this... Section 34(a) read simply prevents any accretion

to rent attributable to the occupation by the tenant entitled to a lease renewal

and on the other side any sitting tenant concession. It does not require the court


to import a fiction with all the uncertainties and distortions that would

inevitably follow.’

18 In HMC Music v Mount Eden Land ((2012) (unreported)) HHJ Bailey took the

contrary view.

‘The observation that the rental effect stems from that factual situation and where

it does not exist, as on renewal, should be kept out of the equation, and the further

comment as to requiring the court to import a fiction may be misleading when

considering the performance of the statutory exercise imposed upon the court.

That is to determine a rent at which, having regard to the terms of the tenancy

other than those relating to rent, the holding might reasonably be expected to be

let in the open market by a willing lessor. This exercise is traditionally, indeed

habitually, carried out by reference to comparables. If the comparables, as in this

case, are of rents payable by tenants who have three-month rent free periods, the

determination of a rent which is to be paid throughout the term by reference to

those comparables must surely reflect the fact that there will be no rent free

period under the new lease. The court is not there importing a fiction, it is having

due regard to the nature of the comparables.’

19 This issue like the second issue arises from the artificiality of the section 34 exercise.

As Sales J said in Humber Oil Terminals Trustee v Associated British Ports [2012]

EWHC 1336 (Ch), [2012] 2 P & CR D27 ‘there is a strong air of unreality about all of

this.’ However the exercise has to be applied logically to the construct. The rent is be

ascertained for a lease to be taken by a prospective lessee who is not already in

occupation. It follows from the disregard at s 34(1) (a) that the tenant is assumed to

have vacated the subject premises. In Harewood Hotels v Harris [1958]1 All ER 104

http://www.lexisnexis.com/uk/legal/search/enhRunRemoteLink.do?A=0.646195494814851&service=citation&langcountry=GB&backKey=20_T23534758129&linkInfo=F%2523GB%2523EWHCCH%2523sel1%252012%25page%251336%25year%252012%25&ersKey=23_T23534758109

http://www.lexisnexis.com/uk/legal/search/enhRunRemoteLink.do?A=0.646195494814851&service=citation&langcountry=GB&backKey=20_T23534758129&linkInfo=F%2523GB%2523EWHCCH%2523sel1%252012%25page%251336%25year%252012%25&ersKey=23_T23534758109


at 107D) Lord Evershed MR approved a passage in Woodfall on Landlord and Tenant

(Permanent Supplement, 1, Business Tenancies) at 71 in which the learned authors

stated that that the premises have to be envisaged as empty premises in the market.

There is also no express direction in section 34 as to whether or not the premises are

fitted out or offered as unfitted out premises but as Sales J held in Humber Oil

Terminals Trustee the subject premises are assumed to be free from tenants’ fixtures.

20 There is no assumption when parties are negotiating a lease on the open market that a

fitting out holiday will be required. However I am satisfied that any retailer operating

from these premises would need to fit out in order to trade. In the absence of special

circumstances –and none have been suggested- I am satisfied that a rent free holiday

of three months would be granted.

21 Two matters follow from this. First it is logical to apply the three month rent free

period to the whole of the term (120 months). This means a rental discount of 2.5%.

Second, as HHJ Bailey said in HMC Music care must be taken to ensure that when

considering comparables, like are compared with like. If the rent in this case is

determined by reference to an unadjusted comparable of a ten year lease with a rent

free holiday, no discount would be applied to the rent so determined. If the

comparable was for a different term, the rent in that comparable would need to be

adjusted to strip out the discount and the rent determined in this case would then have

to be discounted.

ISSUE 2(A) THE MARKET RENT ON A DIY RETAILER ASSUMPTION

Comparables


22. One but not necessarily the only method of calculating the rent is by analysis of

comparable transactions as explained by Lewison J in Marklands v Virgin Retail

[2004] 2 EGLR. 43. The parties and their valuers agree that there is a hierarchy of

comparable evidence with open market transactions being the most helpful

followed by agreed rents for renewals under the Act, agreed rents under rent

review clauses and finally third party determinations with arbitral awards being

treated as more useful than judicial determinations.

Suggested Adjustments

23. The value of a comparable of course varies depending on how similar or dissimilar the

proffered comparable is to the subject premises. Location is an obvious factor. In

addition a number of other specific factors have been put forward in this case. In

summary the main factors which need to be considered are:

i) Location;

ii) The level of demand for the premises;

iii) High/volatile service charge on the Park;

iv) The open A1 planning permission and associated potential to sub-divide;

v) Inadequate customer parking facilities;

vi) Inadequate service yard, loading facilities and turning circle.

Location

24. The parties’ experts dispute the size of the catchment area for potential customers. The

park is within the boundaries of the densely populated London Borough of Haringey but


Mr Bath says\ that the Borough has ‘extremely poor’ demographic profiles with Social

Class AB ‘well below’ the national average. He also drew attention to other retail parks

to the west in Haringey, the south west, Walthamstow to the east and Leyton to the south

east. He argued that the potential catchment area is less than ten minutes drive away and

that the social demographic limits the number of customers within that area.

25. Mr Bath on behalf of the tenants asserts that the retail park is in an area known for its

social and violence problems and as a result the service charge at £1.81 per sq ft is higher

than B&Q’s average service charge of £0.80 per sq ft. As will be discussed shortly the

service charged has been reduced from a much higher level.

26. Similar evidence was produced to the arbitrator in 2010 who found that the catchment

area overlapped with retail provision in Haringey and on the North circular road. He was

satisfied that the site was clearly a busy location which attracted a substantial amount of

customers although the demographic profile of the potential shopping population was

poor ‘and this must impact on the disposable income that is available to customers.’ It is

well known that since 2010 relatively affluent purchasers are moving into areas of inner

London in which they were unlikely to live previously. I am satisfied that these would be

more likely to use their local B&Q than to drive, for example, to Friern Barnet. The

Defendants have traded on the site since 1989 and presumably consider that it is in their

interests to continue to do so. Although Mr Bath asserts that ‘the retail park is in an area

known for its social and violence problems’ no evidence has been produced to show that

the problem is any greater in Tottenham than elsewhere in Inner London but I bear in

mind that the Claimants attribute the higher than average service charge in part to the

need for permanent site security. I also accept that the other traders in or near outer

London have sites which are more likely to attract outlying customers.


The level of demand for the premises

27. The parties accept that of the ‘big three’ DIY retailers only B&Q would be likely to be a

potential tenant. The premises are of a size which is unlikely to attract other retailers. I

am satisfied therefore that there is a very limited level of demand for the premises.

High/volatile service charge on the Park

28. The service charge at the time of the 2009 rent review was £2.81 psf and had increased

fivefold between 2006 and 2009. The arbitrator was of the opinion that an ‘incoming

tenant would…be somewhat alarmed as to their level’. Although he accepted to some

extent the lessor’s argument that the tenant was receiving value for money in terms of a

higher level of security, he was satisfied that it would impact on the rent which he

therefore discounted the rent by 2.6% from £20 psf for a 10 year lease. Since the award

charges have fallen. In 2010/11 it fell to £1.99 and since then has fluctuated between

£1.77 (2011/12) and £1.94 (2013/14). Currently it is £1.86. This is higher than service

charges elsewhere which Mr Wray of the Claimant’s managing agents attributes to a

higher level of cleaning required because of the high number of traffic movements each

day and the need for a full time security presence which is not generally the case in outer

London. I agree with the Defendants that this is a factor which would reduce the market

rent. On Mr Bath’s figures it is currently 2.25 times that of B&Q’s average service

charge in the country but service charges anywhere in London is likely to be higher than

for sites elsewhere.

The open A1 planning permission and associated potential to sub-divide

29. The subject premises have unrestricted A1 permission but no evidence has been provided

which shows that this is not also the case with the retailer comparables. A mezzanine


floor could be installed but there is no evidence that the Defendant has ever considered it

had a need to use what Mr Jones ‘a potentially valuable…amenity’ in order to optimise

its space. I am not satisfied that this is a factor which is likely to influence the rent.

Inadequate customer parking facilities

30. The scheme provides 481 parking spaces which Mr Bath describes as inadequate with 1

space per 453 sq ft of trading space compared to ‘the accepted’ market requirement of 1

space per 225/250 sq ft. Mr Jones accepted that this had been a ‘rule of thumb’ figure

for a long time. I note though that this is not said to be the average space actually

provided and Mr Jones said businesses were prepared to trade at a higher figure. When

the arbitrator inspected the site in 2010 he found that the car park was congested and it

would surely affect the value if customers were unable to park within reasonable

proximity to the store. Mr Jones in his current evidence noted that the Defendant allows

its staff to occupy ‘a ‘significant’ number of customer spaces and this did not indicate to

him that they were desperately short of customer space. Mr Daniel, the Defendant’s

property management surveyor, said in oral evidence that ten members of staff were

allowed to park near the store for safety reasons. Mr Wray gave evidence that he did not

recall the Defendant raising concerns other than the 2010 rent review or that four of the

main tenants on the site, Currys, Agis, Lidl and Halfords had raised the matter during

lease renewal negotiations.

31. I am satisfied that a lower than average number of places is a relevant factor when

comparing the premises with other premises.

Inadequate service yard, loading facilities and turning circle


32. The premises have no dedicated services yard or turning circle which according to Mr

Bath produces operational problems. Mr Daniel did not refer to this in his witness

statement as being a problem. The arbitrator was of the opinion having inspected the

premises that the property was compromised by these sub-standard servicing

arrangements. Mr Jones accepted in cross-examination that the arbitrator did have a

point. There is no evidence of any significant change since 2010 and I accept that this is

a relevant factor to be taken into account when considering comparables.

Open Market Comparables

33. The experts agree that there are three possible open market letting comparables: Units 3,

4 and 5 at the Friern Barnet Retail Park let to B&Q; Unit 6 at Bell Green Retail Park,

Sydenham let to B&Q and Unit 5 at the same retail park let to DSG.

Units 3, 4 and 5, Friern Barnet Retail Park

34. The premises comprise 52,215 sq ft with a 9,750 garden centre let in June 2011 to B&Q

for 15 years at £19 psf. There was a 13 week rent free period which reduced the rent over

the whole term to £17.04 psf. The rent reviews are on an ‘upwards only’ RPI basis. The

current service charge is £0.87 psf. The retail park is close to the North Circular and

unlike the subject premises has planning permission for bulky goods retail.

35. Mr Jones argues that there are few similarities with Tottenham Hale other than that both

are in north London. The location is poor and the site had never been a popular one. It

has a history of vacant units and the landlord had put three units together as ‘a last

desperate measure to… [Let] to a large space occupier’. ‘This was a case of a distressed

landlord taking drastic steps to remove long term vacancies’. However in oral

examination he admitted he had no evidence for this. I also note that his information


about the site may be less than complete because in his first report he wrongly stated that

the site had no garden centre.

36. Mr Bath on the other hand contends that there is an affluent catchment area and although

the access to the North Circular is not ideal it is a good store in terms of location,

configuration, specification and layout. He also argues that the landlord was in a stronger

negotiating position than the Claimant being able to leave the units vacant until the

market improved. It is not unheard of for a landlord to combine three units. Far from

being a ‘last desperate measure’ the landlord had succeeded in letting the units to the

leading DIY retailer on a 15 year lease. ‘On the face of it the letting is an indication of

success rather than desperation’. However in cross-examination he accepted that the

retail park had been carrying long term voids.

37. I am not satisfied on the evidence I heard that the rent was slashed to attract B&Q as a

tenant but I accept that it was reduced to some extent because of the voids in the Park.

Whilst the landlord could of course have left the premises vacant that is hardly likely to

have enhanced the site and would have deprived it of income. However I bear in mind

that as B&Q would be likely to be the only DIY retailer for the subject premises if let on

the open market the Claimant would be likely to offer some reduction in rent to attract

interest. I am satisfied that the Friern Barnet has a better trading position in terms of

prospective customers; it has planning permission for bulk sales and the service charges

are lower. As the experts have not commented on its parking and service facilities I

assume that these are better than for the subject premises. Therefore the rent was affected

by a reducing factor (a wish to remove voids) which does not apply to the subject

premises and by an increasing factor (better trading position). The impact of the two

conflicting factors cannot be gauged arithmetically. All in all I am satisfied that if both


premises had been let on the open market in 2011 without break clauses and at

comparable service charges the Friern Barnet unit would have been at a roughly similar

rent to the subject premises if the latter had been let in 2011.

Unit 6 at Bell Green Retail Park, Sydenham

38. The premises comprise 46,829 sq ft with a 15,000 sq ft garden centre let in December

2011 to B&Q for 20 years with a tenant’s break after 15 years. At £19.22 psf. There was

a 12 week rent free period and capital contributions by the landlord which reduced the

rent over 15 years to £16.51. The rent reviews are to RPI in the range of 0-3%. The

current service charge is £1.25 psf. There is bulk goods planning consent.

39. Mr Jones regards the Bell Green Retail Park as an ‘un-proven, unbuilt scheme’ which

cannot properly be compared with the Tottenham Hale site. B&Q was both an anchor

tenant and the only likely tenant. Homebase had initially been interested and pulled out

leaving the developer with no tenant. Services are poor and there is nearby competition

from both Wickes and Homebase in Catford. As the units on the Retail Park are fully let,

the market rent for the store if agreed today would be a much better comparable for the

subject premises. Now it is a good site but in 2012 taking it was ‘a leap of faith’.

40. Mr Bath considers this to be a good store in terms of location, configuration,

specification, layout and car parking and competition the same as for Tottenham Hale.

He agrees that Homebase withdrew because it could not obtain the planning permission

it wanted. Mr Daniel does not specifically dissent from Mr Jones’s description of B&Q

being an anchor tenant and agrees that it is not unusual for B&Q to be anchor tenant.

41. The difference between the two sites lies in terms of parking and service facilities and

competition. A difficulty arises from the circumstances of the letting in 2012. Although


the experts have no direct experience of the negotiations I accept Mr Jones’s opinion that

the rent agreed was likely to reflect the developers’ desire to attract a potential anchor

tenant to a new and untested site. While B&Q is still likely to be an anchor tenant at

Tottenham Hale, that site is well established. Perhaps B&Q at Sydenham could be

described in 2012 as a magnetic -anchor tenant, magnetic anchors being a concept

probably more common in the commercial letting field than at sea. In my judgment the

magnetic factor reduced the market value of the 2012 rent to some extent but I disagree

with Mr Jones’s opinion that it has no value.

42. As for Friern Barnet the impact of the conflicting factors of the reduction on account of

the magnetic factor and the increase because of greater customer affluence cannot be

gauged arithmetically. All in all I am satisfied that if both premises had been let on the

open market in 2011 without break clauses and at comparable service charges Unit 6

would have been at a roughly similar rent to the subject premises if the latter had been let

in 2011.

Unit 5 at Bell Green Retail Park, Sydenham

43. The premises comprise 35,000 sq ft let to DSG (trading as Curry’s /PC world) in

February 2012 for 10 years at £21.00 psf. There was an 11 month rent free period and

capital contribution by the landlord which reduced the rent over 10 years to £16.74 psf.

The rent reviews are to RPI in the range of 0-3%. I assume that the service charge is

similar to that for Unit 6 namely £1.25 psf. There is bulk goods planning consent.

44. Mr Jones omitted the Unit from both his reports.

45. I have already discussed the nature of the site when considering Unit 6.


46. Mr Bath comments that the store is of similar size to the subject premises but has a better

shape and specification with superior parking and servicing arrangements. He makes the

point that DSG is not an anchor tenant.

47. Unit 5 is very similar to the subject premises but I am satisfied Unit 5 is more likely to

command a higher rather than lower rent (assuming roughly similar service charges) than

the subject premises because of its greater customer affluence. It lacks the magnetic

factor of Unit 6

Lease Renewals

48. Mr Jones did not argue that lease renewals per se could not provide useful comparables

but he asserted that the renewals relied in this case were not a good guide. Mr Bath

admitted in cross-examination that they were ‘a good back up’ and had ‘a very similar’

status to open market transactions. However I note that both parties in a renewal are

unlikely to want to walk away from an established position but the tension between their

two positions may cancel out any effect of this factor.

49. Four renewals have been considered.

i) Homebase Syon Lane, Brentford. A site of 45, 7216 sq ft. the lease was renewed for

10 years from March 2014 at £22.50 psf compared to the passing rent of £26 psf, a

decrease of 13.5%. A rental free period of 6 months reduced the effective rent to £21.38

psf;

ii) Homebase Western Circus, Western Avenue, Acton. A site of 35,555 sq ft. the lease

was renewed for 5.5 years from November 2013 at £20.00 psf compared to the passing

rent of £22.80 psf, a decrease of 12.3%. A 6 months rental free period reduced the

effective rent to £18.18 psf.


iii) Homebase Rom Valley Way Romford. A site of 39,869 sq ft. the lease was

renewed for 15 years from March 2012 at £17.50 psf compared to the passing rent of

£18.95 psf, a decrease of 7.7%. The lessor made various contributions reducing the

effective rent to £16.05. Rent is payable monthly rather than quarterly, a benefit to both

parties.

iv) Wickes 850 High Road, Chadwell Heath. A site of 33,900 sq ft. the lease was

renewed for an undisclosed term from December 2013 at £9.73 psf compared to the

passing rent of £13.50 psf, a decrease of 2%.

Details of the service charges were not provided.

50. Mr Jones pointed out that all these stores were solus stores. He argues that in the main

they had limited alternative uses and that accordingly net rental units were depressed

because landlords were anxious to retain their tenants because of current economic

circumstances in favour of tenants. According him the rent levels for these renewed

leases demonstrated that in general DIY rents have not moved significantly in either

direction for some years. He confessed that he had not found lease renewals where the

rent had risen.

51. Homebase Brentford had significant competition within ten minutes drive. Homebase

Acton had a ‘somewhat tight site’ and limited parking which made it an inferior store

compared with the subject premises. Furthermore it as only 5.5 years. It had competition

from a B&Q store some five minutes away and Wickes, some ten minutes. Homebase

Romford also had stronger competition having two B&Q stores within 10 minutes drive

as well as a Wickes store somewhat further away. The site had adequate parking. Wickes

Chadwell Heath was in an area where demand was very poor.


52. Mr Bath took issue with Mr Jones’s assertion all the stores were solus units: only the

Homebases at Brentford and Acton were. He also disputed that rents were depressed

because of economic factors favouring tenants. The renewals took place between 2012-

14, some years after the 2008 economic downturn. All the passing rents were from 2008,

only one year before the rent review on the subject premises.

53. I am satisfied that it is safe to rely only on Homebase Brentford and Homebase

Romford. Homebase Acton was for a term of only 5.5 years and this must have lowered

the rent from the market value based on a ten year letting. In cross-examination Mr Bath

conceded that a downwards adjustment of rent was required to take into account the term

was 5.5 rather than 10 years and he estimated the reduction as being as between ten and

fifteen per cent. A ten per cent reduction would produce a rental of £22.22 psf for a ten

year period (a decrease from the passing rent of 2.6%) and one of fifteen percent, £26.82

(an increase of 17.6%). I note that in her final submission Ms Windsor calculated the

revised rent at £20 psf based on 10% uplift. However Mr Bath’s evidence was not that

one should increase the agreed rent by 10% but that the rent for a lease of ten years

should be decreased by 10%, a different calculation. These decreases from the passing

rent are so different from the Homebase Brentford and Romford figures and are not in

accordance with Mr Jones’s evidence (discussed later) about the downward rent

movements since 2008 that I am not satisfied that Mr Bath’s concession was justified.

54. Given its low rent Wickes Chadwell Heath clearly has features not shared by the other

comparables and in my judgment offers no reliable guide to the market rent for the

subject site.

55. The two remaining comparables, Homebase Brentford and Homebase Romford, albeit

few in number, afford some evidence to show that rents for DIY premises in London fell


from 2008 to March 2014 by a significant amount. It is not possible to gain any help as

to the extent of the fall given that the earlier renewal had the lesser fall. Based on only

one comparable it would be unsafe to find that rent fell at a greater rate between March

2012 when the renewal of Homebase Romford was agreed and March 2014 (Homebase

Brentford).

56. The two comparables were subject to less detailed examination than the open market

lettings. They both have greater competition that the subject premises although are likely

to have a more favourable demographic and, possibly, a wider catchment area. Details of

the service charge were not provided. Accordingly they offer only a limited direct guide

to the market rent of the subject premises but may have some value as an overall check.

Agreed Rents under Rent Review Clauses

57. Mr Bath produced details of eleven agreed rent reviews involving DIY stores in the

London area (both south and north of the river) which took place between January 2011

and December 2013. All with the exception of the B&Q store at Eltham (December

2013) resulted in a nil increase in the passing rent. The site consisted of two units. Rent

was agreed at £16.90 psf for the larger unit of 32,196 sq ft which included a garden

centre compared with the passing rent from December 2008 of £18 psf (fall of 6.2%)

and £25 psf (an increase of 35.1% from £18.50) for the smaller unit of 10,000 sq ft.

58. Mr Jones’s view is that the reviews are of limited assistance and it has to be

remembered that these were reviews negotiated by an existing tenant during a tenancy.

According to his oral evidence the review clauses were all ‘upward only’ clauses. The

only conclusion which can reasonably be drawn is that there is no evidence to support

uplift.


59. Mr Bath had acted for B&Q in the negotiations and said that it had been clear that the

rental values for units smaller than 10,000 sq ft had increased significantly since the last

review in 2008. He gave evidence that although the settlements do not provide a

definitive level for comparable purposes they demonstrate that rent levels have not

increased between 2007 and 2013, a period spanning both sides of the collapse of

Lehman brothers.

60. I agree that overall the data shows that there has been no increase in rents since 2007/08.

The decrease in rent for the larger unit in Eltham offers support for the findings made in

paragraph 54. Together with the data for Homebase Brentford and Homebase Romford

provides some reason for supposing a fall of more than 5% but it has to be remembered

that this was not a lease renewal.

Third party awards

61. Three arbitration awards have been produced including the award in relation to the

subject premises. Mr Jones states that such awards are generally viewed as second tier

evidence but given the limited number of open market lettings, the three awards and

especially the one concerning the subject premises may be significant. Mr Bath is of the

view that in general arbitration awards provide poor quality evidence and that the two

awards which are not concerned with the subject premises are unhelpful.

62. I accept of the common view of the experts as regards the usefulness of awards in

general and that the two awards which do not concern these premises are unhelpful.

63. As regard the award relating to the subject premises a number of matters have to be

remembered. First, obviously the rent was not reached by negotiation much less on the

open market. Second that there was an existing tenancy. Third, a discount was made for


the high level of services charges. This last matter can be rectified because the arbitrator

assessed the new rent as £20 psf for a term of ten years before discounting to take

account of the services charges. Nevertheless the services charges are still high and some

lesser discount needs to be made. Last, the demographic may have changed. With these

caveats I am satisfied that the award can be of some value if used cautiously because

after all it concerns the same premises.

Out of London Comparables

64. A number of suggested comparables for properties outside London have been produced.

Mr James expressed the view that these can be misleading because London is unique in

having a heavily built up area with little room for expansion. Mr Bath agreed that

London provided the best comparables.

65. I agree with both experts. I have obtained no help from looking at transactions outside

London.

Discussion

66. I am satisfied that rents for DIY retail premises in London of the size of the subject

premises have not increased since 2007/08. Second, evidence of Homebase Brentford

and Homebase Romford supported by the larger B&Q Eltham unit suggest that rents

have fallen. The falls for the three premises range from 13.5% and 6.2%. As has been

said before the evidence is limited but I am satisfied that it is sufficient to justify finding

a fall of at least 5% between 2007/08 and 2013. I have no data which would support a

finding that rents since 2013 have continued to fall since 2013/13. Because of the impact

of the sudden economic downturn at the beginning of the period the fall is unlikely to


have been on a ‘straight line’ basis but would have a greater fall at the beginning of the

period.

67. Of the three open market comparables Friern Barnet (June 2011) had the adjusted rent

of £17.04psf and when viewed in isolation from the other two lettings I am satisfied that

this would have been a rent roughly similar to that of the subject premises if the latter

had been let in 2011 and the service charges had been similar. Unit 6 at Sydenham

(December 2011) had the adjusted rent of £16.51. Again viewed in isolation, I am

satisfied that this would have been a rent roughly similar to that of the subject premises if

the latter had been let in 2011 and the service charges had been similar. Unit 5 at

Sydenham (February 2012) had the adjusted rent of £16.74. Viewed in isolation I am

satisfied that it would command a higher rent because of the greater customer affluence.

68. When considering the award in relation to the subject premises some discount to the base

rent of £20 because of the level of service charges. The service charges for the three

open market lettings are £0.87, £1.25 and £1.25 respectively. The service charges for the

subject premises have fallen from £2.81 at the time of the award to £1.86 at present.

With that fall of £0.95 they are still at least £0.61 higher than the comparables. Mr Bath

suggests that this would justify a modest discount of 0.75%. I agree. This produces an

adjusted rent for 2009 of £19.85 psf. In order to remove the difference between the

premises and the three open market lettings occasioned by the latter being rents agreed in

2011/12 a further reduction is needed to take into account falling rents. Whilst

recognising that this can only be a rough approach I consider that this should be 2%

producing a rent of £19.45 psf.

69. The open market lettings suggest a rent of between about £17.04 and below £16.74.

Although the adjusted rents for Units 6 and 5 are different, the lower rent for Unit 6 can


be explained by the ‘magnetic factor’. Not withstanding the review award for the subject

premises it is highly unlikely that the adjusted current rent is higher than the three open

market lettings. One reason may be the fact that it was decided by arbitration rather than

by open market negotiation and there may also be other unidentified factors. I am

satisfied that that the open market rents are a better guide. All in all I find that if the

subject premises were let at an open market rent in 2011/12 with service charges roughly

the same as the three open market lettings, the market rent would have been £16.51psf,

lower than Unit 5 because of the less affluent customer base and parking and servicing

and the same as unit 6 because that factor was counterbalanced by the ‘magnetic

attraction’ factor. This rent has to be adjusted downwards to take account both of the

higher services charges and the fall in rents between 2011/12 and 2013/14. For the

reasons explained in paragraph 68 I apply a reduction of 0.75% on account of the first

factor and 0.5% for any fall between 2011/12 and 2014/15 (although as I am not satisfied

there was a fall between 2013 and 2014/15 the reduction is for the period until 2013).

Applying both factors to £16.51psf produces a rent of £16.30 psf. No reduction is

required to take account of rent holidays because the rent has been calculated using

comparable rents which include such an adjustment.

ISSUE 2(B) THE DISCOUNT FOR THE MARKET RENT ON A DIY RETAILER

BECAUSE OF THE BREAK CLAUSE

70. It is not certain that that break clause would be operated after 2.5 years- there may be a

slippage in the timetable but I am satisfied that the Claimant’s plans are at such a stage

that a prudent prospective tenant would approach the open market negotiation on the

basis that it would be operated at 2.5 years. The hypothetic tenant therefore would have

less than two and a half year’s trading because of the fitting out and stripping out


periods. Moreover the costs of fitting out and closing, estimated by Mr Bath as being

£2,440, 000 would have to be off-set over a shorter period than if the lease ran for ten

years. On the other hand the parties agree that if the Claimant operated the break clause

the tenant would be entitled to compensation of £775,000. I agree with Ms Windsor that

this is a highly relevant factor. Although the tenant would receive the compensation

regardless of when the Claimant operated the break clause, the nearer the total rent for

the period of occupation is to £775,000 the greater the effect of the compensation and its

attraction to a prospective tenant. It is highly unlikely that, save in exceptional

circumstances where a lessor was desperate to achieve any letting in order to avoid

paying rates for an unoccupied site and having to maintain and insure the premises and

forgoing the services charges, , the premises would be let at a rent so low that it was

matched by the compensation thereby leaving the tenant in a position of being able to

trade at no cost for the premises except for fitting out and closing and paying charges set

out above. These would not be minimal but would be incurred in any event no matter

what the period of the lease. I am satisfied that given the state of the Claimant’s plans the

Claimant and no prospective tenant would consider that a tenant would be likely to

operate the break clause sooner than the Claimant.

71. Mr Jones relies on what he describes as the market practice of allowing a 10%

downward adjustment for a landlord only rolling break after 5 years. This in fact was the

same as the discount allowed by the arbitrator because he was valuing a five year term.

The Claimant relies for further support on the decision of HMV UK Ltd v Detail Plus

General Partner Ltd (unreported 11 March 2011) in which Recorder David Potts sitting

in the County Court allowed a 10% discount for a rolling six month break operable by

the landlord on six months notice in respect of a lease for a period of five years. From

the judgment it appears that if the break were triggered as appeared very likely the lease


would end after 33 months. He therefore argued that the allowance should not exceed

5% ie the same as if the lease was for five and not ten years.

72. Mr Bath argues that the discount would be greater for a two and a quarter year lease than

for a five year one. He proposed a 50% reduction but offered no justification for the

figure.

73. As in HMV UK Ltd both parties accept that there is a dearth of evidence on the issue of

appropriate discounts. Recorder Potts considered that no discount should be allowed for

a five year lease but I have the evidence that that the arbitrator allowed a ten per cent

discount on a ten year lease. DIY retailers wish to establish a base of loyal customers

and do not adopt the same approach to trading as ‘quick and cheap’ discounters. There is

in my judgment a significant difference between occupation for two and a half years and

five years especially when trading will be for shorter periods because of fitting out and

closing. The parties accept that the appropriate figure is likely to lie between 10% and

50%. In my judgment Mr Jones’s figure is far too low because he does not recognise the

difference between five years and two and a half years. I consider Mr Bath’s proposed

50% is out of proportion with the 10% allowed on five years. Doing the best I can in the

absence of comparables and taking into account the difference in impact between a break

after two and a half years rather than five which justifies a discount of more than double

the one for a five year break, I find that an appropriate discount is 25% of the rent fixed

for a ten year period. I therefore find that the rent for a DIY retailer on the open market

would be £12.22 psf.

ISSUE 2(C) THE MARKET RENT FOR A DISCOUNTER

74. Neither expert suggested in their reports that the most likely tenant would be a

discounter- who is willing to trade for a short term and who would carry out a ‘quick,


cheap and dirty’ fitting out/stripping out. Hence neither produced- and perhaps would

have been unable to produce- comparables. In oral evidence Mr Bath confessed this was

a scenario that valuers do not face. In reality I suspect that the property would be placed

on the market in order to see what offers would be made. Therefore both valuers could

only make tentative suggestions based on their professional instinct.

75. Mr Jones suggested that the open market rent for a discounter taking a ten year lease

would be advertised at £18-19 psf with a deal done at £17 to £18 psf. £17.50 psf is

16.7% lower than his suggested open market rent of £21 psf for a DIY retailer. This

rent should then be discounted by ten per cent because of the ten years lease. He

therefore suggested a post-discount rent of £15.75. However in cross-examination he

frankly admitted that if he was instructed by a tenant rather than for a landlord he would

press for a rent 10% lower than his figure of 17.5 %. Mr Duckworth argues that in all

likelihood the parties would meet in the middle and agree £16.63 psf. This would then be

reduced by the ‘ten year discount’ resulting in a rent of £14.97. I note that the figure of

£16.63 is 20.8% lower than the Claimant’s suggested DIY rent of £21 psf for a ten year

term.

76. Mr Bath considered that a discounter would take a lease for a ten year at between £11 to

£12 psf, at £11.50 psf a figure which is 24.3% lower than his suggested rent for a DIY

lease for a ten year term namely £15.20 psf. In so far as he relied on the out of London

letting of The Range at Maidstone at £10.25 psf for a twenty year term I am not satisfied

that this is an appropriate comparable because it is not in London, is for a much longer

term and the Range does not appear to be a discounter of the type suggested.

77. Bearing in mind that both experts are applying their considerable experience but without

comparables and that I have no evidence which can sensibly distinguish between the


two, I take the mid point between their suggested figures namely 22.55%. Applying this

discount to my finding that £16.30 psf is the appropriate rent for a lease to a DIY retailer

for a ten year term produces a rent of £12.62 psf.

78. This rental must be discounted to take account of the break clause. Mr Jones suggests a

discount of 10% and Mr Bath, 40%. I have to bear in mind that the Discounter’s fitting

out costs and closing costs are likely to be lower than those for a DIY retailer and that

the time taken would be less. In my judgment therefore the discount should be less than

the 25% for a DIY retailer. Doing the best I can I am satisfied the appropriate discount is

20%. I therefore find that the rent for a discounter retailer on the open market would be

£10.10 psf.

Comparing the DIY Rent and the Discounter Rents

79. The DIY approach produces a rent of £12.22 psf and the Discounter approach, £10.10

psf. I am satisfied that I have to choose between these figures and that to split the

difference would be unprincipled. In the real world B&Q will of course take the lease

and will trade in the notional rent free fitting out period. However the artificiality of

section 34 requires the rent to be judged for a lease to a hypothetical tenant not yet in

occupation. The valuers agree that if any of the three DIY retailers were looking for new

premises, they would not take Unit 10 with the break clause. Therefore I have to accept

that the hypothetical tenant would be a discounter. I therefore find that the rent will be

£10.10 psf or £373,700 per annum.

INTERIM RENT

80. The experts agreed that the interim rent should be taken to be the renewal rent before an

adjustment is made for the break clause. Applying this to my findings the interim rent on


the Discounter basis would be £12.62 psf. However this agreement was reached on the

basis that the hypothetical tenant would be a DIY retailer. I do not understand either

party to be arguing that the agreement should not be applied to the undiscounted rent for

a Discounter. If they are so arguing, this should be indicated when corrections to the

draft judgment are submitted. It is unlikely though that there will be time on the 11th

March 2016 to hear submissions on the point and a further short hearing may have to be

listed. The judgment will however be handed down in the 11th

March at 9.30am at

Bromley County Court.

11th

March 2016 HHJ John Mitchell

a01ed747 a01ed748 sitting at central london thomas …€¦ · case no: a01ed746 a01ed747 a01ed748...

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