County Court decides ‘pandemic clauses’ are not a fair and reasonable variation to the terms of an existing business lease 

England and Wales

Summary

In Poundland Limited v Toplain Limited [2021] the County Court considered various clauses proposed by the tenant, Poundland Limited, and opposed by the landlord, Toplain Limited, in business lease renewal proceedings under the Landlord and Tenant Act 1954 (the “Act”). The proposed clauses included a request to pay rent in arrears, variations to an indemnity, ‘pandemic clauses’, a MEES provision and other miscellaneous terms. 

Issues

The landlord and tenant had already agreed many of the commercial terms of the renewal lease including the annual rent, interim rent and length of term. However, the parties could not reach agreement on several provisions proposed by the tenant, largely in reaction to the challenging financial circumstances and uncertainty created by the Covid-19 pandemic.

One key category of the tenant’s proposed variations was ‘pandemic clauses’ - clauses designed to deal with the imposition of any ‘use prevention measures’ imposed by the Government as a result of a pandemic.

The ‘pandemic clauses’ included a proposal to halve the annual rent and service charge payable by the tenant whenever use prevention measures were imposed, a provision relieving the tenant of its insurance obligations during lockdown periods and a provision preventing the landlord from forfeiting the lease during lockdown periods. The tenant relied on the recent case of WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellshaft MBH [2021] arguing that pandemic clauses were now commonly agreed in the market during the past twelve months.   

Other proposed amendments included the tenant being allowed to pay rent in arrears, requiring additional information for the landlord to exercise an indemnity (and disallowing ‘double recovery’) and a provision requiring the landlord to cover the costs of works required by the Minimum Energy Efficiency Standard Regulations 2018 (the “MEES regulations”).

The landlord’s position was that the variations, particularly the proposed pandemic clauses, were not supported by market precedent and, importantly, were not supported with reasonable justification by the tenant. The landlord argued the inclusion of these clauses would unfairly change the relationship between the parties by allocating the tenant’s risk onto the landlord in circumstances where the tenant could take advantage of Government relief schemes. Additionally, the landlord argued that, where proposed amendments merely reiterated existing and enforceable regulations, there was no purpose in repeating these regulations in the renewal lease.

Decision

The Court held the following:

  1. That WH Smith concerned the separate question of what the appropriate trigger for an already agreed pandemic rent suspension clause would be. WH Smith did not consider the question of whether the inclusion of a pandemic rent suspension clause was a fair and reasonable variation to the terms of an existing lease. The relevant case for determining such questions remains O’May v City of London Real Property Co Ltd (1983) 2 AC 726, in which it was held that the Court should not freely use its discretion to change existing lease terms. Where a request is made to vary existing lease terms the burden of proof is on the party seeking the variation and the proposed variation must be fair and reasonable, having regard to the terms of the current lease and all relevant circumstances. The fact that the variation reflects market practice is not alone reasonable justification for a change. 

  2. Applying the principles in O’May, the pandemic clauses requested by the tenant were rejected.

    1. In relation to the proposed clauses reducing the rent and service charge during periods where use prevention measures apply, Judge Jenkins reiterated that ‘it is not the purpose of the Act to protect or insulate the claimant other than to allow them to continue their business following the term end.

    2. The Court also held that removing the tenant’s obligation to comply with insurance requirements (unless compliance would be directly against Government legislation or otherwise impossible) was not sufficiently justifiable and created too great a risk on the insurance cover.

    3. In response to the tenant’s proposal to suspend the landlord’s right of forfeiture during lockdown periods, the Court held that to do so would significantly alter the existing commercial balance of risk between the parties in favour of the tenant, especially in light of the fact that Government assistance and supportive measures to limit the impact of the pandemic are currently available to tenants and not landlords.

  3. The proposal to allow the tenant to pay rent in arrears was also rejected. The Court held that the tenant’s cash flow was entirely a matter for the tenant and did not accept that the tenant’s portfolio position in light of the pandemic was a sufficient reason to shift this responsibility and commercial risk. 

  4. The Court approved the tenant’s proposal to require the landlord to pay the costs of works necessary under the MEES regulations. The landlord argued that the clause in the lease dealing with statutory obligations already dealt with the position and therefore the addition was unnecessary. However, the Court held that the addition added clarity to an existing responsibility and hence was an appropriate variation to the terms of the renewal lease. Similarly, the Court decided to uphold the first limb of the tenant’s suggested indemnity provision (but rejected the second limb prohibiting double recovery), because by requiring information to be provided at the earliest possible stage the clause created a better chance of resolving any early disputes. This was a fair and reasonable outcome for both parties.

Conclusion

This decision highlights that, where the Court is considering variations to an existing lease under the 1954 Act, the O’May principles of fair and reasonable justification and examining the balance of risk between the parties remain of utmost importance.

In a decision that will be welcomed by many landlords, the Court was reluctant to approve variations to the renewal lease that shifted the allocation of risk from the tenant to the landlord, even taking into consideration the unexpected circumstances created by the pandemic.

Co-authored by Martin Garner and Sarojah Sathivelu