Pending lease renewals during the pandemic: the interim rent issue

What will be the effect of Covid-19 on the commercial rental market? Without a crystal ball, it's hard to say. However, if market rent falls in the coming months, one thing that I suspect will happen is that tenants will be more likely to seek determination of interim rent.

What is interim rent?

Interim rent is the rent paid by the tenant for the period between the termination of the current tenancy and the commencement of the term of a renewal lease.

Once the landlord has served a section 25 notice to terminate the current tenancy (with proposals for a new one) or the tenant has served a section 26 request for a new tenancy, either party can apply to court, at any time and until 6 months after the termination of the previous lease, for determination of the interim rent. Interim rent will be payable from the earliest date that could have been specified in the section 25 notice or the section 26 request.

If a renewal lease is completed, usually the interim rent will be the rent payable under the new tenancy. However, if the landlord or the tenant can show the court that either the new rent differs substantially from the rent that would have been payable if the tenancy had commenced at the earliest date that could have been specified or that the terms of the new tenancy are substantially different to those of the current tenancy then the court can instead assess the interim rent as that it is reasonable for the tenant to pay.

If a new lease is not completed, the interim rent is the rent which it is reasonable for the tenant to pay while it continued in occupation, having regard to the rent payable under the terms of the current tenancy.

How is this impacted by Covid-19?

Until an interim rent is determined by the court (or agreed by the parties), the passing rent continues to be payable. If market rents are falling but  the landlord and the tenant are unable to agree terms it could be over a year before the lower rent becomes payable, during which time the tenant will be unable to take the benefit of the lower rent.

No company's solvency is guaranteed, particularly in the current crisis. If the rent in a renewal lease is agreed to be lower and the interim rent is determined in the tenant's favour, then it will be entitled to credit or return of the overpayment. The parties can best avoid further litigation by dealing with this on completion.

There is a risk, in both this situation and the situation where a tenant elects not to take a renewal lease following service of a notice/request, that the landlord will not be solvent or have sufficient funds to repay the excess. Solvent landlords would be wise to allocate money for interim rent refunds, rather than face the costs of dealing with claims from tenants.

Tenants should consider serving section 26 notices as soon as possible on sites where they are either coming to the end of the contractual period or are holding over, to ensure interim rent becomes payable soonest. If market rent drops, this could substantially reduce their rental exposure.

If new terms are negotiated into the renewal lease (particularly terms to deal with rent suspension during a pandemic) either party may argue that this results in a lease being granted on substantially different terms to the previous tenancy and that interim rent should be that which is reasonable to pay, rather than the rent under a new tenancy. This will be a hard argument to run, but a test case may appear following the pandemic.

If you are a landlord or tenant with any queries or thoughts, please contact me or a member of our Property Litigation team to discuss the correct tactics for any specific transaction or portfolio.

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