The Covid-19 pandemic brought about many unexpected things. Among these was a spate of unopposed lease renewals making it all the way to trial in the county courts. Few such cases usually reach this stage, owing to the time and cost implications involved. But the novel issues arising over the past 18 months appear to have resulted in parties being left with little alternative but to seek the guidance of the courts on such matters.
Prior to Covid-19, very few leases expressly provided for what would happen to the obligation to pay rent and service charges during a lockdown. Having learnt from this, many tenants are now understandably reluctant to enter into new leases without sharing some of the risk of a further lockdown and having a specific pandemic clause inserted to reduce or suspend payment of rent in a lockdown situation.
The recent county court decisions in WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellschaft MBH [2021] PLSCS 68 and Poundland Ltd v Toplain Ltd (unreported, 7 April 2021) address these clauses in relation to renewals of leases protected by the Landlord and Tenant Act 1954. Here, we consider this aspect of the cases and the likely impact on the rent payable in these new leases if such clauses are included.
Both claimants were well-known retail operators, and the trials took place in the middle of the pandemic. However, the different factual bases of the cases resulted in quite different conclusions.
The law
If parties are unable to agree the terms of a lease renewal, section 35 of the 1954 Act gives the court the jurisdiction to determine them. The leading decision of the House of Lords in O’May and others (Practising as Ince & Co) v City of London Real Property Co Ltd [1982] 1 EGLR 76 provides guidance on this, confirming that the starting point is the terms of the current tenancy. The court then has an almost complete discretion as to the other terms of the tenancy. Those other terms then have a “decisive influence on the market rent to be ascertained”. It is the party proposing the change in lease terms who needs to justify the change as being fair and reasonable in all the circumstances.
The facts
In WH Smith, prior to trial the parties had agreed most of the terms of the new lease, including the term, but remained in dispute about the level of rent to be paid, the interim rent and the services to be covered by the service charge. The parties had also agreed that the new lease should include a pandemic clause, but the parties had not been able to agree what the trigger of such a clause should be.
In Poundland, when the parties arrived at court they had already agreed the rent, the interim rent and the term. The terms in dispute included whether a pandemic clause should be included at all.
WH Smith
Since the principle of including a pandemic clause had already been agreed, the arguments related to what the trigger for the clause should be. Because in effect both parties were proposing a change to the lease terms, the O’May burden did not come into play.
The tenant argued that the pandemic clause should take effect when non-essential retail had to close. Given that the WH Smith store in question contained a Post Office, it was an essential retailer. This meant that it could remain open during lockdowns. However, WH Smith argued that this was not an advantage. The premises were situated in a shopping centre, and as most other shops in the centre were non-essential retail, they had to close. Consequently, footfall in the centre was significantly reduced during lockdowns and so, while WH Smith was open, the trade it took was also significantly reduced. Therefore, the pandemic clause would not assist the tenant unless it was triggered by the closure of non-essential retail.
In contrast, the landlord argued that the tenant had a competitive advantage because it could trade, arguing that the clause should be triggered only if the tenant itself had to close.
The judge agreed with the tenant and held that the trigger should be the closure of non-essential retail, the effect being that the tenant would pay 50% of the rent and all of the service charge, subject to an obligation on the tenant to account to the landlord for any government assistance.
As set out above, first the court decides the terms of the lease and then it decides the rent, because the terms of the new lease could impact on the level of the rent.
There was a significant difference in opinion between the landlord’s and tenant’s experts on rent. After carefully considering the evidence before him, and commenting on the lack of good contemporaneous comparable evidence, the judge ultimately found that the appropriate rent for the new lease should be £404,666, reduced from the passing rent of £953,000 per annum.
The judge also considered the impact of the pandemic clause on the rent in the new lease. The landlord’s expert had accepted that a lease without a pandemic clause would be worth less than a lease with a pandemic clause, and the judge accepted this. The tenant’s expert put forward evidence that the discount for a lease without a pandemic clause should be 10%, but the landlord’s expert did not seek to put a figure on this. Ultimately, given that the judge decided to include the clause, he did not need to decide this point.
There was no comparable evidence on the value of a pandemic clause and the judge did not accept the landlord’s counsel’s submissions, which sought to use economic theory to support a rental uplift of 10%. Instead, the judge relied on the evidence of the tenant’s expert that a pandemic clause has become something that all tenants want and that the market has now priced in. He therefore did not apply an uplift to the rent because of the inclusion of the clause.
Poundland
Here, because the parties had not agreed the principle of the pandemic clause, the tenant who was seeking to introduce the clause had to satisfy the O’May test.
The tenant proposed that the annual rent be reduced by 50% during any lockdown. The tenant sought to justify the change, saying:
- this would modernise the lease;
- it was in the interests of both landlord and tenant that the tenant could continue to trade; and
- the proposed clause was in line with similar clauses agreed between many landlords and tenants in the past 12 months, relying on the WH Smith case.
In response, the landlord said that there was no market precedent for such a clause and that it fundamentally changed the relationship between the parties. The landlord argued that a lockdown event, and the obligation to pay rent through it, was the tenant’s risk to bear.
The judge did not agree that the tenant had satisfied the O’May test, saying it would not be fair and reasonable to reduce the tenant’s liability in these circumstances. The judge said: “It is not in my view sufficient a reason to impose a sharing of risk in circumstances over which the [landlord] would have no control whilst the [tenant] may have some by reference to reliefs or schemes that might be available to them by the government.” However, the judge distinguished the WH Smith decision because the parties had agreed the principle of the clause, saying that the court “was simply determining the mechanics in which it would operate…”
Poundland was therefore left without a pandemic clause, something that the court in WH Smith said was worth less, possibly 10% less, than a lease with a pandemic clause. However, as the parties had already agreed the new rent, the court did not have to consider the rent payable under the new lease.
Takeaway points
- After the WH Smith decision, tenants felt more confident in their prospects of including a pandemic clause and not having to pay an uplift in rent for the benefit of such a clause. The Poundland decision casts doubt on this. If the principle of a clause cannot be agreed then the tenant will need to satisfy the O’May test to succeed in including a pandemic clause.
- Be wary when agreeing the principle of a clause – once the principle is agreed, the court has jurisdiction to determine the mechanics of the clause. In WH Smith, in the context of a shopping centre where footfall is key, it was perhaps easier to justify that the trigger should be the closure of non-essential retail.
- As the judge held in WH Smith, a lease without a pandemic clause is worth less than a lease with a pandemic clause. As a general point, therefore, one should be careful in agreeing the rent without having agreed key terms that might affect the level of rent. In Poundland, no pandemic clause was ultimately included in the new lease and so, arguably, the rent for the new lease should have been discounted. Agreeing the rent in advance of trial will have saved legal and expert fees for the tenant but may have cost it in rent.
- While both judgments are helpful guidance, they are not, being county court judgments, binding precedent. Direction from the higher courts is therefore needed if parties in unopposed lease renewal proceedings are to have greater certainty in relation to the inclusion of pandemic clauses – and their effect on rent.
Mark Reading is a legal director and Ros Monk is a managing associate at Mishcon de Reya LLP
