Commercial Lease Renewal – Covid Clauses

It will come as no surprise that tenants are looking to seek the introduction of rent suspension clauses in lease renewals following the uncertain time both landlords and tenants have experienced as a result of the Covid-19 pandemic.

If the introduction of a new term is ultimately not agreed between the parties, then the matter will be determined by the court or via PACT (Professional Arbitration on Court Terms).

Two cases relating to the introduction of “pandemic clauses” have been determined by the court, WH Smith Retail Holdings Limited -v- Commerz Real Investmentgesellshaft MBH (2021) and the case of Poundland Limited -v- Toplain Limited (2021).

The WH Smith case related to an outlet in the Westfield Shepherd’s Bush shopping centre which contained a post office. During the pandemic, this premises was classed as essential and so had remained open during the lockdowns.

Whilst it remained open, the majority of shops and restaurants in Westfield did not remain open or, even when open, the footfall was significantly reduced within the shopping centre.

Each case will turn on its own facts, and in this particular case, prior to the trial, the landlord and tenant had agreed to introduce a new term whereby the rent would be reduced by 50%, taking into consideration any Government support that would be received in respect of the rent during specified periods. The parties, however, were unable to agree the trigger for the reduction to take effect.

Consideration was given to the fact that the tenant argued that the reduction, during any period, should occur when non- essential retailers were required by law to remain closed, which was contrary to the landlord’s argument that the reduction should only apply during a period when the tenant itself was prevented from opening.

The Judge was therefore asked to consider both positions put forward, and ultimately agreed with the tenant’s argument.

This case can be compared with the Poundland case, where the commercial premises were located on a high street in Twickenham. The tenant sought to introduce new clauses, including clauses referred to as “pandemic clauses”, which would take effect during any restrictions preventing the tenant from trading at the premises which would result in:

  • Rent and service charge being reduced by 50%
  • The payment of rent to be payable in arrears rather than in advance
  • The tenant would be relieved of its obligations to comply with the Insurer’s requirement, and
  • The landlord would be prevented from forfeiting the lease.

The landlord opposed the tenant’s new pandemic clauses on the basis that the tenant would be sufficiently protected by the steps taken by the Government.

As with the introduction of any new clause, Section 35 of the Landlord and Tenant Act 1954 has to be considered having regard to the terms of the current tenancy and all relevant circumstances. The burden of persuading the court fell on the tenant in this case, as the party seeking the introduction of the new clauses and, it must be fair and reasonable in all the circumstances.

The tenant failed to persuade the court to introduce the new pandemic clauses, as the court considered that it would be unfair to require the landlord to share the tenant’s risks and it would not be fair and reasonable to introduce these specific new clauses. The court did acknowledge that the pandemic was a relevant circumstance to which it must have regard, but the court considered that it was not their role to insulate the tenant against commercial and trading risks in such a way as it would prejudice the landlord.

Many landlords and tenants are still experiencing the impact of the pandemic on trading and, unsurprisingly, in an increasing number of lease renewals the tenant is seeking the introduction of a pandemic clause. Some landlords are prepared to negotiate such clauses, whilst others may feel that they do not have the flexibility to be able to continue to accept rent reductions in such circumstances.

If you do require advice and assistance in relation to commercial lease renewals, please contact Nicola Stewart, Anthony Shalet or James John at Rooks Rider Solicitors.

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Written by Elizabeth Sam, Conveyancing Paralegal in the Real Estate team at Rooks Rider Solicitors….