Impact of the pandemic on business lease renewals

England and Wales

Summary

In WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH [2021] the County Court has given important guidance on the impact of the pandemic on unopposed lease renewals under the Landlord and Tenant Act 1954 (the “Act”), in particular the effect of the pandemic on rental values, the inclusion (and triggers) of pandemic rent suspension clauses and the treatment of rent free periods for fitting out.

Background

The case concerned an uncontested business lease renewal of WH Smith’s retail unit in Westfield Shepherds Bush. The tenant served a s.26 notice under the Act requesting a renewal lease to commence on 23 March 2018.

The trial was conducted in November 2020 when the UK was in its second lockdown, however the tenant had been able to continue to trade as the unit contained a post office which was classed as an essential business under the Coronavirus regulations.

Issues

Despite the agreement that the renewal lease should contain a pandemic rent suspension clause the parties were not agreed over the trigger for that clause.  The landlord asserted that the trigger should be the tenant being required to close. The tenant asserted that the trigger should be when other non-essential business were forced to close.

There was also a huge gulf between the parties in relation to the rent payable.  The landlord contended that the rent should be £751,999 per annum and the tenant contended that the rent should be £146,300 per annum.

In addition to arguments around the general impact of the pandemic on rents for retail premises, there was also disagreement over whether the first three months’ rent free for fitting out purposes should be devalued as an incentive when assessing comparable transactions and whether there should be an uplift applied to the annual rent to reflect the inclusion of a pandemic rent suspension clause.

Decision

The Court held:

  1. That the pandemic rent suspension clause should be activated on the closure of non-essential retailers. The evidence showed that despite being able to continue to trade the closure of other non-essential retailers had had a significant impact on footfall and the tenant’s business. The Judge conducted a site visit in November 2020 to a ‘largely empty’ centre.

  2. A rent of £404,666 per annum was payable after taking into account the comparable evidence, demand within the centre, the impact of the pandemic on the wider retail market and an adjustment for location of the tenant’s unit.

  3. That a pandemic rent suspension clause has “become something that all tenants want and that the market has now priced it in”. Therefore, no uplift should in rent should be made for its inclusion.

  4. That comparable evidence should be adjusted to take account of the absence of a rent-free period for fitting out. Despite the fact that on many renewals the sitting tenant has already fitted out, the tenant’s own occupation is to be disregarded under the Act and if the landlord was agreeing new terms in the open market with a new tenant those terms would include a rent free period for fitting out.

  5. The pandemic resulted in the market “differing substantially” and therefore interim rent was not the rent payable under the renewal lease (as is usually the case), but was actually payable at a higher rate from the interim rent start date in October 2018 up to the date of completion, as the market was much stronger in 2018.

Conclusion

The decision shows that the Courts are giving detailed consideration to the impact of the pandemic on business lease renewals and rental valuations. In particular it highlights that pandemic rent suspension clauses are likely to become standard in the market going forward.  

The decision is also a useful reminder that interim rent is not always the rent payable under the renewal lease and that if the market has changed it may be possible to justify that a higher / lower figure is paid. This will be particularly relevant for landlords and tenants that have renewals that take place in the period before, during and after the pandemic.