Monday, 19 July 2021

Covid-19: Should Pandemic Clauses be included in Renewal Leases?


There have been two interesting cases recently on attempts to introduce new so-called “pandemic clauses” into leases as part of the statutory lease renewal process under the Landlord and Tenant Act 1954.

Both cases were in the County Court, and so have no binding effect on future cases, but they are useful examples of how the pandemic has affected lease terms.

The first case concerned WH Smith’s store in the West London Westfield Centre - WH Smith Retail Holdings Limited v Commerz Real Investmentgesellschaft mbH (unreported), 25 March 2021 (County Court) (Judge Richard Parkes QC).

The original lease was for 10 years and had expired in 2018, with the tenant holding over, but the parties agreed on a renewal lease of just 5 years.

The judge had already applied discounts to the passing rent totalling 54% to reflect the pandemic, the location, and the size of the unit.

Crucially, the landlord and tenant agreed in principle that a pandemic rent reduction clause should be included in the renewal lease to avoid the landlord facing a further 10% rent reduction to reflect the onerous liability of paying full rent during a lockdown.

The parties also agreed that it should be based on the tenant paying 50% of the rent and the whole of the service charge.

The judge agreed that such clauses have “become something that all tenants want, and that the market has now priced it in". The court was simply required to determine the mechanics of how that provision would operate.

This contrasts with a case concerning a Poundland store - Poundland Ltd v Toplain Ltd (unreported), 7 April 2021 (County Court).

In this case the court refused a tenant’s request to include clauses in a renewal lease that were not agreed in principle by its landlord and which would reduce the rent by 50% in the event of future government imposed lockdowns; relieve the tenant from complying with its insurance covenants during a lockdown; and vary the forfeiture clause to prevent the landlord from forfeiting the lease during lockdown (something the government has legislated to ban during the pandemic so far).

Where terms of a renewal lease cannot be agreed between the parties and so fall to be determined by the Court, Section 35 of the1954 Act provides for the court to have regard to the terms of the current tenancy and all other relevant circumstances.

The leading case on applying Section 35 is the well-known O’May v City of London Real Property Co Ltd [1983]. The burden of changing the terms of the current lease falls on the party proposing the change and the change proposed must be “fair and reasonable”.

Poundland argued that pandemic clauses should be included to modernise the lease, and that such clauses would be in the interests of both parties.

The landlord argued that there was no market precedent for such clauses; that it would fundamentally change the relationship between the parties; that the impact of any future lockdown would be controlled by legislation; and that the proper course for the tenant would be to take advantage of any benefits or grants offered by the government.

Citing O’May, the District Judge declined to introduce the pandemic clauses on the basis that it would not be fair and reasonable to expect the landlord to share the risk in circumstances over which the landlord would have no control and where the tenant could avail itself of reliefs or schemes offered by the government.

The District Judge distinguished this case from from WH Smith because in WH Smith the court had not been called upon to consider the O’May principles because the parties had agreed in principle to a clause reducing the rent in the event of a lockdown. Here, the court was considering a dispute between parties as to whether pandemic clauses should be included at all.

There is likely to be a spate of similar cases over the coming months, and it will be interesting to see whether a consistency of approach is taken in the county courts, and ultimately whether a case comes before the High Court.

Nevertheless, landlords should think carefully about what impact the absence of such pandemic clauses might have if the new lease is to include an open market rent review clause.

If pandemic clauses are “something that all tenants want”, which seems to be backed up by anecdotal evidence in the market, and become accepted market practice, then a tenant could argue for a discount on an open market rent review if the lease doesn’t contain such clauses.

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