Kelly Cassemis, Commercial Property Associate at Berry Smith Lawyers, considers pandemic clauses within commercial leases.
COVID-19 has had a substantial impact on all aspects of daily life and business. Recent case law provides an interesting insight into the emerging impact of pandemic induced rent suspension clauses in commercial leases. Two recent cases; WH Smith and Commerz Real Investmentgesellshaft MBH and Poundland Limited v Toplain Ltd have had an impact within the context of commercial lease negotiation.
What are rent suspension clauses?
Rent suspension provisions apply when properties become unusable due to a particular restricting situation. Also known as ‘pandemic clauses’ in the context of COVID 19, a rent suspension clause within a lease delays, suspends, or reduces rental payments if a restrictive measure is introduced (for example, a national lockdown). Pandemic clauses could also suspend other requirements such as repair obligations during lockdown but it is the payment of rent when the property can’t be occupied for the permitted use which is the main issue.
WH Smith and Commerz Real Investmentgesellshaft MBH [2021]
In this case, WH Smith and Commerz had both already agreed to the insertion of a rent suspension clause on lease renewal. This clause provided that WH Smith would only pay 50% of the rent should the clause be triggered. However, the disagreement here was as to when this clause would take effect.
WH Smith asserted that the clause should apply when an order is made by the Government for the closure of non-essential retail. However, Commerz disagreed. asserting that as WH Smith was allowed to remain trading due to an essential service (a Post Office) being contained within the store, WH Smith was at an advantage over other retailers. Instead, Commerz claimed that the trigger for initiating the clause should only be if WH Smith itself was forced to suspend trading.
The Court in this case faced two issues:
- What should be the prompt triggering the activation of the rent suspension clause?
- Should there be an increase in rent on renewal because of WH Smith having a rent suspension clause and would WH Smith have a benefit over other retailers?
WH Smith’s argument prevailed. The Court concluded that the forced closure of non-essential retail should trigger the rent suspension clause. The Court dismissed Commerz’s argument, stating that ultimately, WH Smith would be unlikely to benefit from the clause despite containing an essential service, as WH Smith would still face a significant drop in trade, as the general surrounding footfall had reduced dramatically with all other retail being closed culminating in a considerable loss of revenue during the period of lockdown. Due to this negative impact on WH Smith’s revenue, the Court concluded that WH Smith would not have a benefit over other retailers and that ultimately, there should not be an increase in rent on renewal.
Poundland Limited v Toplain Ltd [2021]
The Poundland case further considered the issue of pandemic-imposed rent suspension clause on Lease renewal where there was no such clause in the existing Lease and the Landlord had not agreed to insert one. Poundland asserted that their lease with Toplain Ltd should include a provision reducing Poundland’s annual rent by 50% should any restrictive measure be imposed resulting in an inability for Poundland to trade. Poundland argued that this clause constituted a modernization of their lease, allowing their lease to adapt to the uncertainty surrounding the pandemic. Poundland were relying on the decision made in WH Smith, and also sought the insertion of provisions which would limit the Landlord from terminating their lease during a period of lockdown. They also wanted to include a provision which enabled Poundland to pay their rent in arrears.
However, Toplain disagreed claiming that the commercial relationship between landlord and tenant would dramatically change, and that no precedent existed for the insertion of these pandemic clauses at Lease renewal.
The Court sided with Toplain, concluding that it would be unfair and unreasonable in the circumstances to impose these rent suspension clauses into the lease. The Court adopted the judgement of O’May v City of London Property Co Ltd, concluding that any departure from the existing Lease terms should be fair and reasonable on both parties.
The Court noted that the insertion of a rent suspension clause would significantly alter the commercial relationship between the two parties due to a greater commercial risk being passed onto the Landlord. The Court further considered that the purpose of the Landlord and Tenant Act 1954 is not to allow amendments which would significantly alter risks or significantly prejudice the Landlord. The Court determined that Poundland could instead rely on Government support and relief schemes rather than the insertion of pandemic clauses into their lease.
Poundland’s reliance on the decision in WH Smith was rejected with the Court noting that the facts of the case were important. The Court noted that the insertion of a pandemic rent suspension clause was not in dispute in WH Smith as the insertion of the clause had already been agreed. Rather, the issue in WH Smith was when that clause should apply.
So what happens next?
Whilst the WH Smith and Poundland cases are not legally binding due to them both being County Court judgments, they provide intriguing insights as to the impact of COVID-19 on commercial leases and how the Courts may choose to tackle pandemic influenced rent suspension clauses in the future.
The above cases confirm that serious consideration should be given when negotiating the insertion of pandemic clauses into your commercial lease and the precise terms of those clauses. Pandemic rent suspension clauses are likely to become more frequent in future negotiations for new Leases but it seems that for the moment, the courts may not agree to insert them at renewal unless they are already in the existing Lease. The contrasting conclusions of both the above cases demonstrate that due regard should be given during Lease negotiations to the context, impact and effect of each clause.
Given the continued uncertainty surrounding the ongoing pandemic and any potential future lockdowns, it is undeniable that rent suspension clauses will become increasingly important in lease negotiations as we move slowly back towards a ‘new normal’.
If you have any questions surrounding rent suspension and pandemic clauses or have any queries about your lease and commercial property in general, please do not hesitate to contact the Commercial Property Team at Berry Smith LLP at 029 2034 5511 kcassemis@berrysmith.com or mpursall@berrysmith.com and we will be happy to help.
Kelly Cassemis
Associate