Smithfield Market tenants forced to accept changes to rent and service charge provisions

In his preliminary ruling, Mr Justice Sales said that it was "just and fair" that the tenants should bear the risk of future increases in running and maintenance costs on the site over the length of their new 15-year business tenancies.

"Provision of these services via the City [of London] allows for economies of scale and overall efficiency, but does not change the nature of such costs as in essence running costs of the tenants' businesses," he said. "Accordingly, it is, in my view, just and fair as between the City and the tenants that the tenants should directly bear the risks of fluctuations in such costs, and that the City should not have to bear the risk of subsidising such costs for the tenants if they fluctuate to an unexpected degree upwards."

Property litigation expert Graham Halsall of Pinsent Masons, the law firm behind Out-Law.com, said that the case highlighted a "common misconception" among landlords and tenants that the courts will only depart from the terms of an existing lease if this is "demanded by overwhelming market forces".

"Unlike rent, which is assessed with reference to market standards, section 35 of the Landlord and Tenant Act 1954 is not driven by market forces and is instead rooted in the notion of fairness" he said. "The existing terms are of course relevant, but are not binding and the courts will allow a variation where it is fair and reasonable to do so."

He added that there would, however, have to be "valid reasons" for departing from the existing terms. What helped the landlord in this case, he said, was that previous leases between the landlord and tenants entered into in the 1980s provided for a variable service charge. This was subsequently amended in 2001 to the all-inclusive rent that the landlord was seeking to change. Furthermore, at the time of this amendment, it was specifically provided for in the lease that the payment structure was a matter of dispute and that either party was entitled to revive this particular issue when it came to the renewal of the lease.

"Against this background, the court was able to give much less weight to the existing terms in the 2001 leases than it might otherwise have done," Halsall said. "From a practical point of view, where there has been dispute as to the lease terms and one of the parties is forced to concede, it might be prudent for that party to reserve its position as to that dispute, as this may be something they can rely on in future should circumstances change."

The 1954 Act gives business tenants a certain amount of security so that a lease will generally continue after its expiry date and allows either the landlord or tenant to apply to the court for an order granting a new tenancy. Section 35 of the 1954 Act governs the court's discretion on fixing the lease terms, other than rent and duration.

In a 1983 decision known as O'May, the House of Lords found that the court should not generally exercise its discretion under section 35 to change the basic parameters of a commercial agreement between a landlord and its tenant, which the existing lease evidenced.

Whilst endorsing the principles of O'May, Mr Justice Sales said that there were "significant differences" between the current case and O'May, in which the tenant was able to prove that it would be unfair to force the tenant to take on the risk of service charge changes even in exchange for a reduced rent. Much of the service charge in the O'May case related to the costs of maintenance and decoration of the building, he said, while in the current case the largest element of the running costs was "directly referable" to the tenants' businesses.

Faced with agreement by the parties that, as a matter of principle, the tenant should bear the costs of operating, maintaining and repairing the market, Mr Justice Sales rejected the tenant's case for an "inclusive" rent and ordered a variable service charge as "fair and reasonable" and "in line with market practice".

"Applying the guidance in O'May as a whole, I consider that the City has shown that there are good and sufficient reasons to justify a change in the payment structure under the new tenancies back to the original structure of a rent and variable service charge which formed part of the early 1980s leases between the parties," he said.

Property litigation expert Halsall said that, although the decision would not necessarily make it easier for landlords to change leases, it did show that the courts are prepared, in certain circumstances, to exercise their discretion in relation to the lease terms.

"O'May principles will still make it difficult to amend the lease to provide for a service charge where the existing lease makes no such provision," he said. "However, this case demonstrates that, where appropriate, the courts can, and will, amend the existing lease when it is fair and reasonable to do so."