Should there be a radically different approach to lease drafting to assist tenants in the future?
During the course of a lease renewal battle last month (it settled), it became clear just how radically the current Covid-19 pandemic has changed the attitudes of tenants in the market seeking to renew their leases. In the retail sector, at least, tenants are routinely demanding so-called “Covid clauses”. This compendious term embraces both rent cessers in the event of a disease outbreak rendering it impossible or illegal for tenants to use or occupy their premises; and restrictions of one sort or another on the enforcement of repairing and cognate obligations during similar occasions. In the current climate, with carnage on the high street (owing its origins in many cases to pre-pandemic roots), many landlords are apparently so keen to retain existing tenants who want new leases that they routinely accept such clauses.
There are so few new open-market lettings that nobody is able to say whether the behaviour seen on renewal would be repeated in circumstances where landlords are free to behave in a way that is unconstrained by the dictates of the Landlord and Tenant Act 1954 (and a corresponding wariness of what judges might visit on them were their cases to fight in court). Some might say that it is only fair that landlords should share in the plight of their tenants should the current pandemic continue, or should another strike us in the future, with accompanying lockdowns of the sort we have seen over the last year. But this proposition deserves closer consideration.
Covid rent cessers
Take first the case of rent cessers in the event of a disease outbreak rendering it impossible or illegal for tenants to use or occupy their premises. Why should not both parties share in the misfortune, with half the rent payable being suspended in such circumstances?
There are three points that landlords may make in response, each of which derives support from the fact that the parties are differently circumstanced. First, the tenants may after all be able to trade (as we have seen in substantial parts of the last year in the case of retailers dealing in essential goods); even if they cannot have customers within the premises, they may be able to operate a click-and-collect operation (if A1), or a takeaway service (if A3). The tenants may still derive some benefit from storage; and they can of course take the opportunity provided by the lockdown to refurbish or refit their premises. So, it is wrong to assume that lockdowns automatically penalise all tenants: the essential goods retailers, for example, have in some cases done handsomely out of them. Accordingly, a blanket rent cesser is not something that landlords should unthinkingly accept.
Secondly, tenants have been able to furlough their staff, and take advantage of the rates holiday, thus reducing their costs dramatically. Landlords, commonly holding their property as an investment, will not usually have any such relief available to them, and will experience no leeway in the demands from their mortgagees.
Thirdly, the risk of such interruptions in the tenants’ business have been apparent since at least the occurrence of the SARS-CoV-1 pandemic in the Far East in 2002. As the recent insurance litigation (both Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1; [2021] PLSCS 12, and TKC London Ltd v Allianz Insurance plc [2020] EWHC 2710 (Comm)) illustrates, many businesses reacted to that threat by insuring their businesses against future like interruptions. There was no reason why tenants should not have done the same (and indeed, some did). Conversely, there is no reason why landlords (which usually have no inside knowledge of their tenants’ businesses) should suffer the transfer of that risk to them. Landlords are of course assisted in their arguments by the approach of the House of Lords in O’May v City of London Real Property Co Ltd [1982] 1 EGLR 76.
Ultimately, despite these arguments, pragmatism may play a major part in persuading landlords to concede Covid rent cessers. Even if they succeed in resisting the demand for such rent cessers, they will know that they will face the argument on review or at renewal that the absence of such cessers should lead to a discount in the rent payable. The market talk at the moment is of non-trivial discounts being claimed on renewal. The calculation of such discounts is pure make-believe: nobody saw this pandemic coming, and nobody, surely, is able to calculate the odds of a recurrence. If something is incalculable, how can it be valued? But all the more reason, perhaps, for landlords simply to accept a Covid rent cesser, on the footing that if it is not going to happen, there is no point in not agreeing to the provision, thereby avoiding the discount argument.
Covid repairing suspension
The second type of Covid clause we have encountered consists of restrictions of one sort or another on the enforcement of repairing and cognate obligations in the event of a disease outbreak rendering it impossible or illegal for tenants to use or occupy their premises. At first sight, again, this type of clause seems fair: why should it be possible to penalise tenants for not doing that which they cannot do? Again, however, there is an obvious answer: the court will not allow the enforcement of obligations where performance is impossible – see the decision of the Court of Appeal in John Lewis Properties plc v Viscount Chelsea [1993] 2 EGLR 77) – so a prohibition on enforcement would achieve nothing that the general law does not.
In general, landlords do not enforce repairing obligations during the term, for a variety of practical reasons. A provision preventing them claiming damages for disrepair at the end of the term (or, worse, allowing the tenant to re-enter to carry out remedial works, which I have seen in some drafts) is an unnecessary, irrational and draconian remedy to a problem that has not actually arisen throughout this crisis, and may never arise.
Guy Fetherstonhaugh QC and Kester Lees are barristers at Falcon Chambers
