Court of Appeal ruling sparks rental downturn

The court decided in Allied Dunbar Assurance Plc v (1) Homebase Ltd, (2) Lairdale Ltd that a sub-tenant who was paying the market rate for rental of the premises had to pay a higher rate, which was equivalent to the amount being paid by the tenant.
The landlord had previously allowed the tenant to sub-let on the condition that the sub-tenant paid the same rate as the tenant (the so-called 'passing rate'). However, the court found that a confidential agreement had been signed between the tenant and sub-tenant, in which the latter paid a lower market rate, thus breaching the landlord-tenant agreement.
Mayer Brown Rowe & Maw real estate and environment litigation partner Antony Phillips said that properties filled by tenants who are charging sub-tenants the market rate could become vacant following the judgment, as sub-tenants refuse to pay higher rent.
“The implication is that tenants will be wary of sub-letting premises at a lower rate than the passing rent [because it may be in] breach of the terms of their lease.
“Confidential agreements are not unusual. At present there are fewer premises where the market rate is below the passing rent because there's been a rising market, but there are still some out there. But if the market falls there'll be many more, and [this will give rise to] more tenants trying to mitigate their position.” Even rates for some commercial properties first rented in the late 1980s – when rental prices went through the ceiling – remain higher than 2002 market rates.
But according to Phillips, there are uncertainties over the success of Allied Dunbar's potential damages claim for breach of the lease agreement because of difficulties in proving that it has suffered loss.
Michael Barnes QC of Wilberforce Chambers, instructed by Nabarro Nathanson, acted for Allied Dunbar. John McDonnell QC of New Square Chambers, instructed by Russell Jones & Walker, acted for the tenants.