Where a lease has a term commencement date which does not coincide with the date of the lease, the rule in Bradshaw v Pawley [1980] 1 WLR 10 means that Year 1 for the purposes of your net present value (“NPV”) calculation commences on the latter of the two dates.
The period(s) for which rents are payable will usually coincide with the term commencement date so, where the term commences after the date of the lease, the Year 1 rent will align with the rents reserved by the lease. However, where the term commences before the date of the lease, the Year 1 rent may, for the purposes of the NPV calculation, straddle parts of Years 1 and 2. An apportionment may therefore be required where rents are variable.
Example
A lease is dated 1 May 2019 but has a term commencement date of 1 January 2019. The lease is granted for a ten year term, with rents reserved of £40k for the first two years, increasing to £60k for the remainder of the term. The Landlord has not opted to tax.
Applying the rule in Bradshaw v Pawley¸ for the purposes of calculating the NPV, Year 1 will commence on 1 May 2019, with each subsequent year commencing on its anniversary. The Year 1 rent will be £40k but Year 2 will need to be apportioned as, on 1 January 2021, the rent will increase to £60k. Account will therefore need to be taken of rent of £40k from 1 May 2020 until 31 December 2020 and £60k from 1 January 2021 until 30 April 2021. Once apportioned, this results in an annual rent for Year 2, for the purposes of calculating the NPV, of £46,575.
Years 3-5 will then be £60k and, as a result of the rents being variable, the highest rent payable during Years 1-5 will need to be identified and applied as the rent for the remainder of the term (in this case £60k for Years 6-10). The rent for the final year of the term will be apportioned to reflect Year 10 commencing on 1 May 2028 and ending on 31 December 2028
POROS’ new non-residential lease calculator automatically applies the rule in Bradshaw v Pawley and makes it clear when each of Years 1-5 start for the purposes of the NPV calculation. Should you need to apportion the rents, it is equipped to enable you to input the different rents and the dates they become effective and it will then do the requisite apportionments for you.