Summary of recent decisions regarding the impact of COVID on commercial lease renewals
Pre-pandemic it was quite rare for commercial lease renewals to be determined at trial. Due to the impact of online trading, the recent spate of tenant administrations and liquidations, and finally COVID, it is not surprising that landlords and tenants have looked to the courts to resolve disputes with there now being significant differences between the parties in what they consider should be the new lease terms and in particular the new annual rent.
Three recent cases have given some indication as to the court’s approach to determining new post-pandemic lease terms.
Court refuses to include a pandemic clause in a lease renewal
In the unreported case of Poundland Limited v Toplain Limited, the court refused to include a clause proposed by the tenant to reduce the rent and service charge by 50% during a ‘use prevention measure’ (which would include lockdowns due to a pandemic) to modernise the lease.
The court accepted the landlord’s argument that the guidance in O’May v City of London Real Property Co Ltd should apply and that imposing the clause would fundamentally change the relationship between the parties. Under O’May a party proposing a change to the terms of the existing lease must persuade the court that there is a good reason for doing so based on essential fairness between the parties.
The judge found that it would not be fair and reasonable to impose such a clause on the landlord when the tenant was able to call on various government support packages, whilst the landlord was not. The judge also rejected other proposals submitted by the tenant to suspend compliance with their obligations and the landlord’s right to forfeit in the event of a lockdown.
Court determines the trigger for an agreed pandemic clause and the impact of Covid on non-lockdown premises
In the reported case of WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft mbH, the court considered the impact of COVID in determining a number of issues in a lease renewal.
In this case, the parties had already agreed that a rent suspicion clause could be included in the renewal lease and that the rent should be reduced by 50% during the “suspension period”, but could not agree on what would trigger that period.
As the tenant operated as a newsagent and post office they could continue to trade during lockdown but argued that because they were based in a shopping centre, the impact of the lockdown had resulted in a loss of football and 90% reduction in sales. They argued that the rent suspension should apply in the event of a shutdown on non-essential retail, whereas the landlord argued it should only apply if the tenant itself was forced to close.
Judge Richard Parkes QC found in favour of the tenant concluding that that being able to trade during COVID restrictions in a deserted shopping centre was only a notional advantage to the tenant.
Interestingly and in contrast to the Poundland matter, the judge commented that as the parties had agreed to include a pandemic clause the tenant was not required to persuade the court that one should be included, but that if that position was wrong, then he would find that the interest of fairness demanded such a clause. This was reflected in the judge refusing an uplift in rent for the inclusion of a rent suspension clause stating that “a pandemic clause has become something that all tenants want, and that the market has now priced it in”
As regards rent, the court considered the effect of rental values in the whole of the shopping centre due to tenants not renewing leases, CVAs, and tenants relocating nearer to a key anchor tenant. Accordingly, the court ordered a 54% reduction in rent based upon a 20% reduction due to COVID, 20% due to location and 10% due to size. This equated to a reduction of rent in the region of £550,000 per annum.
On interim rent, the court shifted from the usual position that the interim rent should be the rent payable under the renewal lease and instead ordered the higher rate of £758,785 per annum from the interim rent commencement date.
Impact of COVID on rent assessment in lease renewal proceedings
S Franses Ltd v The Cavendish Hotel (London) Ltd was back before the court (the court had previously determined the tenant’s right to a new lease) but this time to determine the terms of that new lease. The court was asked to consider the impact of COVID on the rent payable under the new lease.
The court acknowledged the difficulties faced by rent review experts in dealing with a COVID-dominated rent assessment without comparables but heavily criticised "the unhelpfully partisan approach taken by the experts". In respect of the tenant’s expert, the court found that some evidence did not "merit any weight", and of the landlord’s expert’s that the "general approach was partial and unbalanced”. This is an important point to note on the approach of experts on lease renewal matters going forward.
At trial, the landlord’s expert accepted the inevitable impact of COVID on post-pandemic rental values, expressing that an appropriate discount would be "probably in excess of 30%". The court, however, did not attribute any particular fixed percentage reduction in rent as a result of the pandemic.
Despite this, the court determined that the appropriate rent for the renewal leases would be £102,000 per annum, less than half the passing rent of £220,000 per annum under the previous leases.
As with WH Smith Retail Holdings Limited above the court also moved away from the standard position that the interim rent should be the rent payable under the renewal lease. Instead applying the "standing back and feels about right" test to order an interim rent of £160,000 per annum.
What this means for you
Whilst these cases are County Court matters and are not binding, and even though S Franses Ltd does not provide any new law, all three should be of interest to both landlords and tenants as an indication of the court's approach to lease renewals in the post COVID environment.
The key points to note are:
- The court is prepared to slash rents to reflect the current market;
- Interim rent will not automatically be the new lease rent;
- A tenant will not automatically be granted a rent suspension clause
It seems negotiation is the key, and both sides need to be realistic in their assessment of the current rental market when considering the new lease terms.
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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of BLM. Specialist legal advice should always be sought in any particular case.