Local authority successfully claims portion of commercial sub-lease cancellation fee

The pursuer, 3639 Ltd, was the head tenant under the lease, and originally raised the action to seek an order for the transfer of the tenant’s interest to another party. The defender, Renfrewshire Council, opposed this and counterclaimed for a percentage of the cancellation premium. 

The case was heard in the Outer House of the Court of Session by Lord Ericht. 

Rack rental income 

The head lease was entered into by the defender, who held the landlord’s interest, in the early 1970s. The lease provided that the rent payable to the landlord was 16 per cent of the rack rental income. The tenant subsequently sub-let the various buildings on the site to a number of entities.  

A supermarket building on the site was sub-let to a Co-op entity, Rochpion Properties, for an annual rent of £268,000. Rochpion, in turn, sub-let to a charity, RAMH, for a rent of £1 per annum. Rochpion’s sub-lease was due to expire in July 2037. 

The pursuer acquired the head tenant’s interest in February 2019. At that time, Rochpion renounced their sub-lease with effect from 13 February 2019 and given effect by a Deed of Renunciation in favour of the pursuer. 

The consideration for the renunciation was a payment by the Co-op entity, Rochpion Properties, to the pursuer of £4,250,000. The practical effect of the renunciation was that the defender would now receive 16 per cent of the annual rent paid by the charity of £1 instead of 16 per cent of £268,000 for the remaining years left on the sub-lease. 

The pursuer’s position was that an unquantified element of the premium related to the sub-tenant’s renunciation of its obligations to pay future rent, and that the other unquantified elements within the Premium related to the sub-tenant’s renunciation of its obligations relating to service charges, rates liability, dilapidations and insurance premia. 

On 28 March 2019 the pursuer sought the defender’s consent to an assignation of the tenant’s interest in the Head Lease. The defender did not consent, on the grounds firstly that payment was due to the defender as the rental element of the premium fell within “rack rental income”. 

The pursuer argued that the defender had unreasonably withheld its consent to the proposed assignation, but subsequently abandoned the principal action due to coronavirus-related uncertainties regarding the assignation. The case therefore proceeded in respect of the counterclaim only. 

It was submitted for the defender that the word “rents” as contained in the conditions of the head lease encompassed both actual rents received from the sub-tenants as well as rental premiums received. If payments in lieu of rent were to be excluded, clear wording to that effect could have been included. Further, the head lease was a development lease, and so both the landlord and the tenant were intended to participate in the investment. 

Shares the highs and lows 

In his opinion, Lord Ericht noted the potential for abuse where lump sums are paid by tenants instead of periodical payments, and said: “The logic of the pursuer’s argument is that the rent is payment for future occupation, the rental element of the lump sum is not a payment for future occupation, therefore the rental element is not rent and does not form part of the Rack Rental Income. While that argument does have some attraction in its logical simplicity, what it fails to take into account is the contractual structure as a whole.” 

On the nature of the lease he agreed with the defender’s submissions, saying: “The landlord shares in the highs and lows of whatever rental income is achieved from the sub-lets. In these circumstances, the common intention of the parties to the Head Lease is that the defender as landlord shares in the proceeds of the development of the shopping centre by receiving a percentage of the proceeds. The definition of ‘rack rental income’ must be read in the light of that common intention.” 

He continued: “The pursuer’s construction would defeat that intention. It would permit the pursuer to keep all of the premium, notwithstanding that part of that premium represents future proceeds in which the defender would otherwise be entitled to participate. It would permit the pursuer to strip out a future income stream as capital. It cannot have been in the contemplation of the parties to the Head Lease that their common intention to share in the proceeds could be easily frustrated by the taking of the proceeds in a lump sum rather than periodical payments.” 

Lord Ericht concluded: “It makes no difference that the figure of the surrender premium was arrived at by the parties to the Renunciation Agreement on a broad brush basis without being quantified in detail. It is perfectly understandable that such an approach was taken in the commercial negotiation of the Renunciation Agreement. However, the fact that parties happen to have adopted a broad brush approach does not mean that the rental element of the premium cannot be quantified.” 

For these reasons, declarator was granted in favour of the defender, with the case proceeding to proof on the quantification of the rental element to determine the exact amount of the defender’s entitlement.