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Under the Act as originally enacted in 1954, the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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