The pandemic and business lease renewals – practical points and considerations for landlords, tenants and investors following the recent decision of WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH
The County Court’s decision in WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH 20th April 2021 provides helpful guidance and has shone a light on the impact the pandemic has had on business lease renewals in a changing market. This is the first reported case where the terms of an agreed pandemic rent suspension clause was in issue, and therefore an important case for landlords, tenants and investors negotiating business lease renewals or involved in litigation.
The case concerned premises in Westfield Centre occupied by WH Smith under a lease for a term of 10 years commencing on 1 October 2008 at a passing rent on £953,000 per annum. WH Smith served a Section 26 Request for a new tenancy on 23 March 2018. The premises contained a post office and as such, were classified as essential retail during the pandemic. Whilst WH Smith was permitted to remain open, the non-essential retailers which surround the premises were closed, severely reducing the footfall to the premises and as a result its sales were down by over 90%.
The parties had largely agreed the terms of the new lease, including a pandemic rent suspension clause. However, the parties disputed “the rent payable under the new tenancy, the list of services comprised by the service charge, the trigger for a pandemic rent suspension clause, and the interim rent payable until the new tenancy is granted”.
The landlord contended that the pandemic rent suspension trigger should be if the tenant was required to cease trading altogether. However, the tenant asserted that the trigger should be the closure of non-essential retailers because the burden on the tenant staying open was more onerous. The Court took the view that “the landlord’s proposal is effectively empty, because circumstances are most unlikely to arise in which the landlord’s trigger would be activated”.
Although the WH Smith case is a county court decision and as such not binding on other judges, it may now be easier for tenants in the retail and leisure sectors (in the absence of agreement) to negotiate the terms of any pandemic rent suspension clause on realistic terms.
It should be noted that the decision did not include a determination on whether under the principles set out in O’May v City of London Real Property  the Court would have agreed that it was reasonable to include a pandemic clause. In O’May Lord Hailsham said that “there must be a good reason for the court to impose a new term not in the current lease against the will of either party, and the fact that the burden of persuading the court to change the terms is on the party proposing the change”. In WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH whilst HH Judge Richard Parkes QC commented that pandemic rent suspension clauses have now become the norm this may assist a party in lease renewal negotiations but may not go far enough to persuade a judge that a pandemic clause should be included if this is not agreed.
In relation to the rent, there was a significant gulf between the parties and the decision highlights the importance of comparable evidence. The landlord sought a rent of £751,995 per annum however the tenant contended that the rent should be £146,300 per annum. The parties disagreed over the comparable evidence relied on, and how this should be treated and applied.
The landlord asserted that unless the tenant was required to remove its fit out at the end of the term, there would be no reason for the landlord to offer any fitting out concession, and the comparable evidence should not be adjusted to take account of the absence of a rent-free period for fitting out. Additionally, the landlord argued that a 10% uplift should be applied to account for the inclusion of a pandemic rent suspension clause. The tenant argued the contrary, on both points.
The Court found for the tenant and took the view that the “pandemic clause has become something that all tenants want, and that the market has now priced it in” and as such, no uplift in the new rent should be applied. Furthermore, the Court favoured the tenant and held that the 3-month rent free fit out should be treated as an incentive and the comparable evidence should be adjusted accordingly, and consequently set the new rent at £404,666 per annum.
When considering the interim rent, the Court found for the landlord and concluded that the interim rent was not the rent payable under the renewal lease (as is usually the case) but instead, a higher rate from the interim rent commencement date. The Court took the view that “the retail market was much firmer in October 2018 than it is today” and “had the rent been agreed at that time, it would have differed substantially from the new rent”.
Whilst this is only a County Court decision, we anticipate that going forwards it will now be harder for landlords to resist pandemic clauses in the negotiations of new leases. This decision also highlights the Court’s pragmatic approach in considering the pandemic’s effect on the retail and leisure industry in particular, and the importance of comparables in a changing market.
Depending on the market and property sector concerned, we anticipate that some lease renewals, and interim rent applications, will now be pursued with more vigour. This decision addresses a number of issues typically faced during lease renewal negotiations and in consequence will unblock some business lease renewals that have stalled.