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The Impact of Covid-19 on Commercial Lease Renewals

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Negotiating commercial lease renewals under the Landlord and Tenant Act 1954 (“the Act”) has come into greater focus recently, as tenants seek more flexibility following the Covid-19 pandemic. In this article we look at the changing landscape with regards to commercial lease renewals.

Pandemic clauses

Many tenants may now wish to include pandemic clauses in their renewal lease to minimise their exposure in the event that a government enforced lockdown prevents them from trading.

In Poundland Limited v Toplain Limited, the tenant sought to include a pandemic clause preventing its landlord from forfeiting the lease during a lockdown. The landlord argued there was no market precedent for it, and its inclusion would unfairly shift the risk.

Though the Court ruled the tenant had failed to justify the need for a pandemic clause in this instance, Judges are increasingly likely to allow for the inclusion of pandemic clauses provided it can be shown that it would represent a fair and reasonable variation to the terms of the existing lease.

Rent

WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH concerned an unopposed lease renewal in which the parties could not agree on the amount of rent payable.

WH Smith occupied a shopping centre unit, remaining open as an essential retailer during the second Coronavirus lockdown, while all other shops in the shopping centre had been forced to close due to falling sales. Nevertheless, the landlord sought a 10% uplift in rent as it had agreed to the inclusion of a pandemic rent suspension clause.

Under the Act, the Courts are directed to determine the rent payable by considering what a willing landlord might reasonably expect to receive if the premises were to be let in an open market.

Having considered the level of demand as well as the state of the wider retail rental market, the Judge decided in favour of the tenant that that there should be no rent uplift caused by the insertion of the pandemic rent suspension clause, not least because pandemic clauses are now sought by most tenants and the rental market has largely taken this into account.

Interim rent

Franses Limited v The Cavendish Hotel (London) Limited concerned an opposed lease renewal where the amount of interim rent payable was in dispute.

Interim rent is typically set at the same level as the rent under the renewal lease. However, in this instance, the Court was required to assess the level of rent which would be reasonable for the tenant to pay from year to year, as the lease renewal had previously been opposed by the landlord.

An important consideration was that there had been a significant change in the rental market from the date the original tenancy expired in January 2016 and when the claim was heard in 2021, largely owing to the effects of the Covid pandemic.

The Judge considered both the passing rent under the previous lease, set at £220,000 per annum, and the new rent of £102,000 per annum. The Judge ultimately sought to strike a balance between the tenant and landlord’s interests and set the interim rent at £160,000 per year.

What does the case law tell us about the Court’s approach to these commercial lease renewal issues?

These judgments demonstrate the changing landscape with regards to commercial lease renewals. Any proposed variations to a renewal lease must be fair and reasonable in the circumstances. Ultimately, the Court will aim to strike a balance between the interests of the landlord and tenant when determining these types of cases. It is important to take early legal advice before serving any notices under the 1954 Act and consider the changing landscape before negotiating any new terms.

Siôn Fôn is a property litigation solicitor in Darwin Gray’s Litigation team and will be happy to assist both landlords and tenants who are currently engaged/expect to be involved in both contested and uncontested commercial lease renewal proceedings. Get in touch now for an initial free, no obligation conversation.

Email: [email protected]

Direct dial: 029 2082 9107