Court case highlights business challenges as judge rules tenfold increase in rent

A local company said it would move to new premises after the Supreme Court ruled that its annual rent should increase from £12,000 to over £120,000.

The case highlighted not just the challenges faced by businesses emerging from the Covid-19 pandemic amid continued Brexit uncertainty, but also how the shift to residential properties on Devil’s Tower Road has created an “acute shortage” of warehouse and industrial space.

Autosport Limited, based in Rosia Road, had brought a claim against its new landlord, Sundersons Limited, after the property was purchased in 2021.

The two parties agreed that they would enter a new tenancy agreement for a period of six years, with a rent review after three years.

The premises occupied by Autosport consists of a large showroom with workshops in a registered area of 6,448 square feet or 559 metres squared.

The Supreme Court heard Autosport proposed a new rent of £17,664 per year, based on the £12,000 rent agreed in 2009, increased in line with the Gibraltar Index of Retail Price since then.

But Sundersons said the open market rent for the premises, based on comparable properties, was £170,000.

Autosport’s position is that the ongoing EU Brexit treaty negotiations, the effect from the Covid-19 pandemic and the Ukraine conflict has created an element of “uncertainty” and resulted in a downturn in business.

The company argued that “there are no suitable comparable properties”, and therefore the established methodology of assessing open market rent cannot be applied to its business.

Barrister Charles Gomez, who represented Autosport in the hearing, told the court it “should not hesitate” in moving away from the established practice of using rent comparisons.

But the landlord, Sundersons, argued that there is a shortage of warehouse space on the Rock as a result of the boom in residential developments across Devil’s Tower Road.

Guy Stagnetto, KC, who appeared for Sundersons, further said Gibraltar is “not in dire economic circumstances” and that the rent had to be assessed “as at today’s circumstances”.

Both parties presented valuation experts to bolster their position.

Brian Francis, who gave expert evidence on behalf of Autosport, told the court the “best and fairest” way for determining the open market rental value is to adjust the initial market rent agreed under the same criteria by reference to the General Index of Retail Prices.

This would see an upward adjustment from £12,000 rent per year to £17,664.

He told the court that using comparables “would ordinarily” be the right method, but in this particular instance there are no other comparables to use, as both the Bassadone and Capurro showrooms are owner occupied.

Paul Gibson, who carried out the valuation for Sundersons, argued that the premises were very well located and that the property was much larger than registered.

“The retail market has slowly recovered with trade close to pre-Covid levels and rents starting to rise,” Mr Gibson told the court.

“In respect of warehouse space there is an acute shortage in Gibraltar particularly as the Devils Tower Road area which was historically a more industrial area is changing more to a residential area with warehouse space reducing.”

He cited six examples of similar properties or locations of similar size for comparison.

“If [the premises] came onto the market demand would be high from other showroom users, supermarkets and bulk type retailers,” Mr Gibson added.

“Such prominent large units are rare in Gibraltar and this unit is on one of the busiest roundabouts in Gibraltar.”

“In my opinion, the open market rental for this unit should be set at £21 per sq ft on the ground floor and say basement at 50% of this level.”

“We have assumed that the property is in full repair for the purpose of this valuation, which equates to an open market value of £170,000 per annum exclusive.”

In his judgement, Puisne Judge Liam Yeats said: “However cold the approach may be, the court does not concern itself with whether Autosport would be able to afford any significant increase in rent.”

“The court’s task is to determine what the open market rent is.”

Mr Justice Yeats said that while he did not doubt the evidence that traders were concerned about the long-term economic outlook, it was also clear that “a successful outcome to the EU/UK treaty negotiations on Gibraltar is generally preferred to a ‘no deal’ scenario”.

“However, whilst the court can take some judicial notice of the general consensus, there is no actual evidence before the court by an economist which would lead me to conclude that the situation is so dire that the court should depart from the prevailing method of assessment of market rent,” Mr Justice Yeats added.

He said he had to look at the situation as it was now and apply the comparables methodology “as far as possible”.

Mr Justice Yeats said Autosport’s proposal for an annual rent of £17,664, which works out at £2.73 per sq ft based on an area of 6,448 sq ft, “is so far below that of any of the comparables that it cannot represent the open market rent for the premises”.

“It cannot even be taken as a starting point,” Mr Justice Yeats said.

“It seems to me that the Trafalgar Bar’s rent has to be the appropriate starting point,” he said in his judgement.

“It is next door to the premises and I regard it as a good comparable.”

“The rent was set in 2017 at £21.72.”

“It is a smaller property and account has to be had for that.”

“The Soho shop pays at £14.57 per sq ft although that rent was set in 2009.”

“The Eroski supermarket also pays rent at £23.24 per sq ft.”

“This supports the conclusion that £21.72 is an appropriate starting point.”

“I will discount this rate to take account of the fact that the premises are larger and, to a lesser extent, will also apply a discount to take account of the low passing rent.”

“In my judgment, taking all of this into account, the open market rent of the premises is £15 per sq ft.”

Autosport shall be granted a new tenancy over the premises for a period of six years, Mr Justice Yeats said, with a rent payable of £121,755 per annum.

He added that the new tenancy agreement would commence within three months after the hearing.

However Autosport has decided to take the business in another direction.

“High rents negotiated by nearby businesses weighed on the Court,” a spokesman for AutoSport told the Chronicle after the judgement was handed down.

“We had hoped that the state of the economy would impact on the decision, but we had planned carefully for this outcome and have adequate alternative accommodation to ensure that Autosport emerges stronger.”

“For 2024 we are about to launch a new selection of motorbikes for the Gibraltarian market as we have been doing for the last quarter of a century and our repair and maintenance team is as active as ever.”

“However, as a prudent business, whose focus is on our customers and staff a move to alternative premises is called for and is one which we look forward to with excitement.”