Select Committee on Regulatory Reform Second Report


Proposal E: Interim rent

Present position

Under the Act as originally enacted in 1954, the rent under the lease which was coming to an end continued until the new lease came into force. Clearly, in a rising market, any continuation of the current tenancy beyond its contractual term date was likely to disadvantage the landlord who was receiving rent at the old rate. Tenants thus tended to employ delaying tactics so as to continue enjoying possession at the old rent.

To deal with this problem, the Act was amended in 1969 (following a recommendation by the Law Commission in 1969) to allow the court, on application by the landlord, to determine an interim rent, in substitution for the contractual one.[71] Interim rent runs from the date for the end of the current lease specified in the landlord's section notice or tenant's section 26 request or, if later, the landlord's application for interim rent, until the end of the continued tenancy, i.e. until the new lease starts or the tenant quits.

An interim rent is not necessarily the same as the market rent payable under the new lease. The amount of the interim rent is what would be ordered on the renewal of the tenancy, but having regard to the rent payable under the terms of the current tenancy, and on the basis that the new tenancy is granted from year to year. This generally results in an interim rent which is less than the rent eventually ordered on the grant of a new tenancy, and thus "cushions" the impact of any rise between the old and new rents.

Problem and proposals

Who can apply for interim rent and time for applying

At present, only the landlord can apply to the court to fix an interim rent. A tenant who, when the old lease ends, finds himself paying more than the market rent cannot apply to the court to fix an interim rent so that he pays less.

In accordance with the Law Commission's recommendations, the Department proposes that the tenant should also be able to apply for an interim rent, and that (to prevent duplication of proceedings) a current application for interim rent by the landlord or the tenant should preclude the other from applying.[72] As commercial rents have continued to rise in recent years, the proposal to allow tenants to apply for interim rent is likely to be of little practical effect, but it is not inconceivable that rents could fall at some future date, thus prompting applications by tenants.

There will be a cut off date for applications for interim rent: an application for interim rent may not be made more than six months after the termination of the old tenancy.[73]

Date for Payment of Interim Rent

At present, tenants can adopt a stratagem to extend their current tenancies at the old rent. This presupposes (as will often be the case) that the tenant is paying a rent under the lease which is below the current market rent. It is therefore in his interest to seek to prolong the old tenancy for as long as possible. Once the tenant has served a section 26 request, the landlord cannot serve a notice to end the lease.[74] So, if the landlord does not serve a section 25 notice promptly, the tenant can pre-empt him by serving a section 26 request giving a maximum 12 month's notice. This enables him to gain an extra 6 months' occupation at the old rent.

An example will serve to make this clear. Suppose a lease term expires on 30 June 2003. During December 2002 the landlord considers serving a section 25 notice to end the tenancy on 30 June, as he will be entitled to do,[75] and expects that the new rent (or an interim rent) will start then. Just before the landlord is ready to serve his section 25 notice, the tenant serves his section 26 request,[76] specifying 15 December 2003 as the date for the new lease to begin. He is entitled to do that, but it gives him almost 6 months longer at the old rent.

To deal with this problem, the Department proposes (broadly in line with the Law Commission's recommendations) that any interim rent ordered should run from the earliest date which could have been specified in the tenant's section 26 request or the landlord's section 25 notice.[77] Thus, in the example given above, the interim rent would run from 30 June 2003.

Amount of Interim Rent

As indicated at paragraph 120 above, the current formula for determining the interim rent generally results in the interim rent being fixed at a discount from the market rent. The Department's proposals[78] (in line with the Law Commission's recommendations) distinguish between two cases depending on whether the tenant in possession has been granted a new lease of the whole of the property.

Full market rent as interim rent

A new method of determining the amount of interim rent will apply where a new tenancy has actually been granted and the following conditions are satisfied:

the tenant was in occupation of the whole of the property comprised in the lease when he made his section 26 request or the landlord gave his section 25 notice, and

the landlord's section 25 notice stated that he was not opposed to the grant of a new tenancy or he gave no counternotice in response to the tenant's section 26 request.

In such a case, the interim rent will (subject to the qualification mentioned in the next paragraph) be equal to the rent initially payable under the new tenancy. The principle underlying this proposal is that, since the tenant has been granted a new lease of the whole of the property he was occupying, there is no sustainable case for giving him an interim period at a discounted rent.

The proposal in the preceding paragraph is subject to the qualification—which does not figure in the Law Commission's proposal—that the court will be able to vary the amount if either party shows that:

  • the new market rent (which prima facie is the interim rent) differs substantially from the market rent at the time when interim rent became payable; and/or

  • the occupational terms (eg, repairing obligations) for the new lease are significantly different from those under the old lease.

Discounted market rent as interim rent

For cases where the conditions mentioned at paragraph 128 above are not satisfied, the formula for fixing the interim rent will, in essence, be that which currently applies.[79]

The existing formula will also be used where the court has made an order for the grant of a new tenancy and has ordered payment of interim rent at the full market rent (see para 128 above) and either (a) the court subsequently revokes the order for the grant of a new tenancy,[80] or (b) the parties subsequently agree not to act on that order. In such a case either party may ask the court to re-assess the quantum of interim rent in accordance with the current formula. But a further application for an interim rent (under new section 24A (1)) will not be required. The court, having decided on the original application that an interim rent should be payable, will not be required to exercise its general discretion once again as to whether or not to order an interim rent at all. The only matter for the court's determination would be the new amount.

Removal or reduction of a burden

These provisions would remove a burden by allowing a tenant to apply for interim rent. They would also reduce a burden on the landlord in the situation where interim rent would be the full market rent, rather than the discounted rent (see para 128 above).

Imposition of a new burden

The Department argue that these particular proposals do not impose any new burdens. However, we suggest that they may be considered to impose a new burden on tenants (albeit one that it proportionate; see paragraph 136 below) in those circumstances where he may be required to pay the full market rent as the interim rent, and therefore a higher rent during the interim period than under the existing law (see paragraph 128). They would also impose a new burden in that the interim rent will be payable for a longer period than under the existing law. The proposal to allow the tenant to apply for interim rent could be regarded as a burden on the landlord in that the interim rent could be less than the contractual rent he would otherwise receive.[81]

The new section 24A(3) (inserted by article 18 of the proposed order) appears to impose a new burden, by setting a time limit for applications for interim rent. However, the Department does not justify this new burden in its explanatory document. We therefore asked the Department whether it regarded this provision as imposing a new burden, and if so how the imposition of this new burden could be justified in terms of the Regulatory Reform Act. The Department's response is discussed at paragraph 137 below.

Re-enactment of existing burdens

The existing burden on tenants that they may be required to pay a higher rent than the contractual rent during the interim period would be re-enacted.

Proportionality

We are satisfied that all the burdens imposed or re-enacted by these proposals are proportionate to the benefit expected to result. The new burden that tenants may in certain circumstances have to pay the full market rent during the interim period would only apply where there is no convincing reason for a discount from the full market rent, and is therefore proportionate to the benefit to landlords of receiving a higher rent. In other cases the amount of the interim rent will be fixed in accordance with the current formula. The re-enactment of the burden on tenants that they may have to pay a higher rent than the contractual rent during the interim period would also be proportionate to the resulting benefit to landlords of receiving a fair rent during that period: there seems to be no good reason why the tenant should continue to enjoy the landlord's property at an outdated rent during the interim period.

In response to our question, the Department agreed that the imposition of a time limit may be regarded as a new burden for the purposes of the Regulatory Reform Act. It stated that this new burden met the proportionality test, but did not say why it believed that to be the case.[82] We consider that the new burden is proportionate to the benefit to the other party of not having to respond to an application for interim rent made a long period after the termination of the tenancy. The Department should confirm in the explanatory statement which will be laid alongside any draft order consequent on this proposal that it agrees with this assessment.

Necessary protection

We are also satisfied that these proposals would not remove any necessary protection. Under the Dept's proposal the amount of interim rent would be raised to the full market rent figure in certain cases. However, necessary protection would be maintained by the requirement that this proposal would apply only in cases where it is just to do so (i.e. where a new tenancy of the whole of the property was granted), and the court would retain its present discretion whether to order interim rent. Further, the court would have power to make adjustments where there were substantial differences in market rents since the start of the rent period, or where the new tenancy was on substantially different terms from the existing one. In cases where a new tenancy was not granted, the amount would be determined in accordance with the current formula. Here also the court would retain its discretion whether to order interim rent.





71   By the insertion of a new provision-s 24A-in the Act. Back

72   Proposed order, article 18 (new s 24A). Back

73   Proposed order, article 18 (new s 24A(3)).  Back

74   S 26(4). Back

75   To end a tenancy a landlord must give between 6 and 12 months' notice expiring on or after the contractual term date: see para 55 above. Back

76   The commencement date for the new tenancy specified in the request can be at any time between 12 and 6 months after the request, provided that the specified date must not be earlier than the contractual term date: see para 61 above. Back

77   Proposed order, article 18 (new s 24B). Back

78   Proposed order, article 18 (new s 24C). Back

79   Proposed order, article 18 (new s 24D). But, additionally, the court will have regard to the rent payable under any sub-tenancy of any part of the property, Back

80   Under s 36(2) the court must revoke an order for the grant of a new tenancy which it has made if the tenant applies for revocation within 14 days of the making of the order. Back

81   A tenant would in practice only apply for interim rent where the market rent was less than the contractual rent. Back

82   Appendix B, paras 17-19. Back


 
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Prepared 19 December 2002