Interim Rent – All You Need To Know
What is interim rent?
Interim rent is the amount of rent that a business tenant must pay for the period that its lease continues under the Landlord and Tenant act 1954 (“LTA 1954”), after the contractual expiry date, where the landlord has served a section 25 notice or where the tenant has served a section 26 request.
Why is interim rent important?
In this series of articles we have been looking at the commercial lease renewal process, which is governed by the Landlord and Tenant act 1954.
The primary focus of that process is to help the parties to reach an agreement upon the terms of a new business tenancy, with the ability of the court to determine them if agreement cannot be reached.
However, many ancillary issues can arise during that process. One of those is the amount of rent that the tenant should have to pay in the interim period until the new lease starts.
That is because market conditions can often change, meaning that the rent that the tenant has been paying under its existing lease (the “passing rent”) no longer reflects a market rate. If market conditions suggest that the interim rent will be higher than the passing rent, a landlord is likely to apply for it to be determined. On the other hand, if market conditions suggest that the interim rent will be lower than the passing rent, a tenant is likely to apply.
Why bother?
In some cases, applying for an interim rent will not be necessary because the parties will agree what the interim rate should be, or, for example, where there have been no material changes in market conditions and the rent under the renewal lease remains the same as the rent that was payable under the lease that has been renewed. That might be the case where the previous lease was granted for a relatively short period.
There are plenty of circumstances however where the interim rent will amount to a substantial figure. In some cases, it can be millions of pounds. That might be the case for example where a tenant has taken a lease of large prime premises under which it has paid rent for ten or fifteen years at a rate that no longer reflects market conditions at all.
If that lease was granted at a time when rental rates were toward the bottom of the market, the passing rent might now be very low indeed. If rents have increased significantly since then, the landlord will want to get the tenant to pay a rent that reflects those higher market conditions as soon as possible. Conversely, if a tenant took a lease at the top of the rental market, and if conditions have deteriorated considerably since then, perhaps following a crash or a recession, it will want to pay a rent that reflects those lower market conditions as soon as possible.
The LTA 1954 provides a party that stands to benefit from a change in market conditions to fix a date from which interim rent will be payable, which should prevent the other party from seeking to benefit by delaying matters (to extend the period that the passing rent is payable for).
When is interim rent payable from?
This will depend upon who has initiated the lease renewal process.
For further information on how the process is started, take a look at our on the Initial Stages of the Commercial Lease Renewal Process.
Landlords - Section 25 Notices
Where a landlord has initiated the process by serving a section 25 request, interim rent is payable from the earliest termination date that could have been specified in that notice.
Tenants - Section 26 requests
Where a tenant has initiated the process by serving a section 26 request, interim rent is payable from the earliest date that could have been specified in that request for the new tenancy to commence.
What does “Could Have” mean?
It is important to note that interim rent is payable from the earliest date that either party could have specified in their notice, rather than the date they actually did. The earliest date that could have been specified will be the date that is six months from service of the notice, unless it was served more than six months prior to the contractual expiry date of the exiting lease, in which case it will be the contractual expiry date.
The rent payable under the existing lease – the passing rent – must obviously be paid until contractual expiry. A section 25 notice or a section 26 request must give not less than six months’ notice, nor more than twelve. Fixing the date from which interim rent is payable to the earliest date that could have been specified in the notice prevents a party from seeking to benefit from an outdated passing rent for an extra six months by serving twelve months’ notice instead of six.
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How to apply for an interim rent to be determined
There are three ways in which an application for interim rent can be made:
In a lease renewal application
A party applying for the court to determine the terms of a renewal lease can include an application for the court to also determine an interim rent in its Claim Form.
In an acknowledgment of service
A party that has been served with an application for the court to determine the terms of a renewal lease can include an application for the court to also determine an interim rent in its reply to that application, which will be set out in a document known as an “Acknowledgment of Service”.
As a standalone application
If an application has not been made to court to determine the terms of a renewal lease, or if an application has previously been made but has been settled or has already been determined by the court and determination of an interim rent was not requested within those proceedings, a standalone application can be made to court asking it to determine one.
When can an application for an interim rent be made?
An application for the court to determine an interim rent can be made at any time after a section 25 notice or a section 26 request has been served provided that it is made no more than six months after the existing tenancy has expired under the provisions of the LTA 1954. In practice, these applications are almost always made in the Claim Form or the Acknowledgment of Service, so timings are not usually an issue. If a party overlooks including it within either, it may then make a standalone application but will need to be aware of the six-month time limit referred to.
The requirement for a court order
This point is often overlooked and is another reason to be aware of the six-month time limit. Unless the parties agree it between themselves, an interim rent will not be payable unless an application for its determination has been made to court. So, where the terms of the new lease have been agreed without the need for court proceedings but interim rent has not been addressed, a party may need to issue a standalone application to protect its ability to claim one. If it doesn’t and the time limit passes, the passing rent will remain what was payable for that period.
How interim rent usually works in practice
Where the terms of the new lease are agreed between the parties, they will often agree what the interim rent is between themselves also. Theoretically this may result in a balancing payment on completion of the new lease, with a payment to the tenant for the interim period if the interim rent is agreed at a lower rate than the previous passing rent, or a payment to the landlord for the interim period if the interim rent is agreed at a higher rate than the previous passing rent. If it is not agreed however, the court will need to make a decision having regard to specialist valuation evidence put forward by each party.
How is interim rent calculated?
There are two different methods used to calculate the amount of interim that will be payable.
Method 1 – The most common method
The first method applies where the tenant is granted a new lease of the whole of premises that it previously occupied following service by the landlord of a section 25 notice which did not oppose renewal of the existing tenancy, or following service by the tenant of a section 26 request for a new tenancy.
Pursuant to section 24C(2) of the LTA 1954, where Method 1 applies, as a general rule the interim rent will be the rent that is payable under the renewal lease.
To convince a court not to apply this general rule, a party would have to satisfy the court that either:
a) There has been a substantial change in market conditions since the date that interim rent became payable; or
b) The terms of the renewal lease differ significantly from those in the terms of the lease that has been renewed.
In scenario a) the interim rent will be the rent that the court would have determined for the renewal tenancy applying the principles set out in section 34 of the LTA 1954 – you can read about those in our article on the Court’s Approach to Unopposed Lease Renewals.
In scenario b) the interim rent will be the rent which, in the court’s opinion, it is reasonable for the tenant to pay while the relevant tenancy continued.
Method 2 – Applies in all other cases
The second method used to calculate interim rent applies where the new lease granted to the tenant is not of the whole of premises that it previously occupied, or where the landlord opposed the grant of a renewal lease to the tenant.
Under Method 2 the interim rent will be the rent which, in the court’s opinion, it is reasonable for the tenant to pay while the relevant tenancy continued.
Pursuant to section 24D(2) when it comes to determining what would be reasonable, the court shall have regard to:
(a) the rent that was payable under the terms of the existing tenancy; and
(b) the rent payable under any sub-tenancy of part of that tenancy.
The court will otherwise determine the interim rent applying the principles that it would when determining the rent for the renewal tenancy set out in section 34 of the LTA 1954 (see above) but on the basis of a tenancy granted to the tenant from year to year.
What happens if the lease renewal claim is discontinued?
As discussed above, an interim rent application can be made in the Claim Form or the Acknowledgment of Service in a standard application for a renewal lease. If the parties agree terms for that renewal lease and complete it, the claim for a renewal lease will no longer be required so they will have it discontinued. Interim rent will usually be agreed as part of the process, but if it isn’t, what will happen to an interim rent application made in a lease renewal claim that has been discontinued?
The answer is that it will survive the discontinuance and will remain a live claim that will need to be settled between the parties or determined by the court in the usual way.
The importance of a good valuer
It should hopefully be obvious from this article that the input of a specialist expert valuer will be critical in deciding whether or not to pursue a claim for interim rent, or whether or not to resist one. That expert should have detailed knowledge of the local rental market and access to relevant comparable evidence in that area to help the landlord or tenant to make an informed decision. Their valuation advice and supporting evidence can be crucial in resolving a dispute about interim rent, or succeeding with a claim at court if it can’t be resolved between the parties.
Often that expert will negotiate with the expert appointed by the other party to narrow the issues between them to try to reach a compromise. Their advice will also help to inform any settlement offers that are made, and to assess any that are received. It is always a good idea to take the advice of a specialist valuer well in advance of embarking upon the lease renewal process. We are pleased to work with many great valuation experts, whose advice to our clients is always very welcome.
How we help
Whether or not to pursue an interim rent claim is one of the key things we consider from the outset when our clients approach us to renew a commercial tenancy.
Interim rent is often not at the forefront of their mind when they contact us. We look at the terms that they are proposing, or those that have already been proposed by the other party, and compare them with the terms of the existing tenancy to help encourage our clients to think about interim rent if they haven’t already. We encourage our clients to take specialist valuation advice, and we work with them and with their expert to navigate the process from start to finish, through the court process, negotiation, or both, whether they are the party making an interim rent application, or the party responding to one.
As with lease renewal proceedings, planning ahead, getting specialist advice, and good communication are key to resolving interim rent claims quickly and cost effectively.
We work with our clients to achieve that, so that they can get back to focusing on their business.
Further resources
For an in-depth look at some of the other key issues that arise in commercial lease renewals, please see our detailed guides below on:
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An overview of the commercial lease renewal process
where we summarise in one handy guide everything that commercial landlords and tenants need to know about this process.
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The initial stages of the commercial lease renewal process
where we look at everything from initial strategies to service of notices and issuing an application at court for a new lease.
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The post issue stages of the commercial lease renewal process
where we look at every stage of the court process from service of the claim to witness statements, experts reports and trial.
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The court’s approach to unopposed lease renewals
on how the courts determine the terms of a new tenancy where the parties are unable to agree them.
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Professional arbitration on court terms (PACT)
where we look at the process of referring determination of the outstanding terms of a renewal lease to a third party.
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Opposing the grant of a new tenancy
where we look at the seven grounds upon which a landlord can reply to oppose the grant a new lease to a tenant.
