1954 Act consultation - Interim rent (Questions 33 and 34): Interim adjustment and enforcement of balancing payments

During the continuation period, the tenant must continue paying the rent under the existing tenancy until the renewal rent and interim rent are agreed or determined. If those figures are later fixed at a different level, the parties must then account to one another retrospectively.

If the rent for the new tenancy is higher than the passing rent, the tenant must therefore make a top-up balancing payment. If it is lower, the landlord must refund the overpayment or give credit for it. The longer the continuation period, and the greater the difference between the old rent and the eventual figures, the more significant that balancing payment will be. 

The current position can create real commercial pressure.

In a rising market, the landlord may receive less than the new rent for a considerable period and then face difficulties recovering a significant top-up from the tenant. In a falling market, the tenant may continue overpaying rent for months or longer and may then face difficulties recovering the excess from the landlord. That creates both a cash flow issue and an enforcement issue. The enforcement in particular can be a real risk to a tenant if the landlord says it cannot afford to pay the sum. We have encountered this difficulty many times and for a lot of tenants this is a real issue.

There is an obvious attraction to allowing the court to make an interim adjustment of rent during the continuation period. In principle, that could reduce the build-up of large balancing payments and bring the parties’ cash flow position closer to the likely final outcome.

However, the practical difficulties are significant.

Any application for interim adjustment is likely to require the court to engage with the very valuation dispute that lies at the heart of the substantive proceedings. Competing expert evidence could turn the application into a “mini trial”. The court may also be drawn into wider questions about hardship, recoverability and financial risk. That would add cost and complexity and may distract from resolving the substantive dispute itself. In addition, there is the practical question of how you value the rent when at this stage the lease terms are not agreed – not only will the terms impact on rent but if there is a substantial change it may even change the basis of the valuation. The parties won’t know this until the matter has concluded.

We did consider one solution could be to take the parties claimed position as a starting point. So if the current rent was £150,000 and the tenant proposed in its claim a rent of £100,000 and the landlord had proposed £125,000 in its response, for the period until determination the tenant could pay a rent of £125,000 (i.e. adopt the landlord’s position). This problem with this is twofold. First, the rents could be proposed on totally different terms. Secondly, and probably the biggest issue, is parties may change their positions as a result – i.e. they may well just adopt passing rent as their position. The consequence would mean parties being further apart in their pleaded cases, which won’t be of benefit. 

In practice, the better solution may be to accelerate final determination of interim rent and renewal rent, rather than introduce a new interim procedure which will only add cost and complexity. 

First there is the question of the interim rent actually being determined. This does not automatically happen once the renewal lease has been entered into. The parties have to agree the basis for the interim rent valuation first and then, if not agreed, the figure has to be determined in the same way as the rent. This gives either party the opportunity to delay payment and the party seeking the payment then has to incur what are usually unnecessary costs to get a determination. One way around this is to say that unless a party notifies the other within X days of lease completion that it wishes to rely on an exception, that the interim rent shall be the same as the rent under the new lease. This would then crystallise the sum due. In most cases the interim rent is the same as the current rent so we do not believe this would be unduly prejudicial for it to be imposed, save where a party has triggered a procedure for the interim rent to be determined as an exception.

Once the sum is ascertainable, the issue is then enforcement, which question 34 addresses and asks whether the balancing payment should comprise a money judgment or whether it should amount to rent payable under the terms of the tenancy. This is a key issue as we have seen on many occasions where recovery of the balancing payment has been an issue. There is a query whether it would be appropriate to create an asymmetrical position where tenants are expressly permitted to offset balancing payments due from their landlord against future rent (regardless of any no-offsetting clause), whilst preventing landlords from enforcing balancing payments due from their tenant as if it were rent under the tenancy. Inevitably treating the payment as rent is more onerous for a tenant owed money as, if it cannot afford the lump sum payment it risks forfeiture. However, if the sum is due the landlord can enforce and we query whether forfeiture is more onerous than the potential of insolvency action by the landlord.

The key issue to us is how to ensure payments can be enforced, on both sides, and protect the position where there is a change in identity of the parties. This is not so much of an issue when a tenant transfers its interest as the landlord could require payment as a condition. The tenant does not have the same option when the landlord transfers its interest. Allowing the tenant to offset the payment against sums due under the lease would protect a tenant in this scenario but it would need to have a statutory right to do so as most leases will prevent any deduction by the tenant against lease payments (which should in our view be all lease payments, not just rent).

Take a tenant paying £100,000 per year during a lengthy continuation period. 

If the renewal rent and interim rent are later determined at £130,000, the tenant may face a substantial backdated liability. Of course, it should have budgeted for the increase but this is only if properly advised. It may therefore have a cashflow impact once payable in a lump sum either at completion or shortly after completion of the lease.

If the renewal rent and interim rent are instead determined at £70,000, the tenant may have overpaid significantly. Most tenants prefer for the lump sum to be reimbursed on completion of the lease. However, this currently needs the landlord to agree to do so. When the landlord will not agree, there is a strong practical case for a) determining the interim rent shall be the same as the new lease rent unless the landlord, in this case, triggers an alternative valuation within a set period and b) allowing the tenant to then credit that overpayment against future sums due under the lase, rather than having to pursue it separately as a debt. As mentioned above, this is particularly attractive when a landlord sells its interest after the lease has been granted as it gives the tenant a remedy, especially if the previous landlord is no longer solvent. At present, especially over the last decade or so where rents in the retail market have been reducing many renewals, there is a significant risk to the tenant in being able to secure the interim rent reimbursement.

The right to offset against lease payments is not necessarily a panacea as sometimes the reimbursement is so high that it will take many years to pay back, in some cases longer than the lease term. But it is at least better than having to continue to make lease payments whilst the sum remains outstanding. 

Of course, the trigger to crystallise the interim payment as a debt could also be used for when the rent has increased. Once crystallised as a debt, the landlord could then seek recovery and could have the usual remedies available.

The above examples show why Questions 33 and 34 are closely linked. The absence of any interim adjustment mechanism can increase the size of the balancing payment, and the larger that payment becomes, the more important its enforceability is in practice.

Possible reform options include:

• creating a limited procedure for interim adjustment of rent, with tight case management to avoid a “mini trial”;
• retaining the current position and focusing instead on faster determination of interim rent and renewal rent;
• leaving balancing payments to be enforced as ordinary judgment debts; or
• adopting an asymmetrical approach under which tenants may set off overpayments against future rent (regardless of any no-offsetting clause), but landlords may not enforce balancing payments due from their tenant as if they were rent under the tenancy. 

In our view, the consultation identifies a genuine practical problem and one we have encountered on behalf of clients on numerous occasions. The current regime can produce substantial balancing payments that create cash flow pressure and enforcement risk for both landlords and tenants. 

As to Question 33, the idea of interim adjustment is attractive in principle, but difficult in practice. Any such procedure would need to be tightly controlled if it is to avoid becoming an expensive and distracting “mini trial” and there remains questions as to how you can value the interim rent prior to lease terms being concluded.

As to Question 34, there is a good argument for limited reform to improve the ability to recover overpayments. Whilst in practice, parties may settle on a lump sum being paid, a payment plan, a credit or set off, this can take time and ultimately relies on an agreement between them. At present the position is particularly prejudicial to tenants who are at risk in particular of a landlord’s insolvency. Whilst the preference would be for payment to be on lease completion, and for it to be automatically due and owing, a sensible backstop would be a statutory right for the tenant to offset against all sums due under the lease. We are also in favour of the default position being that the interim rent be determined as the new rent, so it crystallises, unless a party notifies otherwise within a specified period. 

The most persuasive outcome may therefore be a cautious one: limited reform where it improves practical fairness.