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Lawbite: Lease Renewal terms – rent and Covid

  • United Kingdom
  • Litigation and dispute management
  • Real estate
  • Real estate litigation - LawBite

01-07-2021

WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft Mbh (County Court)

The retail sector was experiencing significant change pre-pandemic and Covid has created an astonishing additional amount of unpredicted turmoil. Settling new lease terms and valuing retail premises during times of such unprecedented change raises difficult questions and provides significant challenge. It is against this backdrop that judgment has been published after a 4-day hearing of a tenant’s unopposed application for a new tenancy of retail premises in the Westfield Centre, London.

The matters in issue were the rent payable under the new tenancy, the interim rent, the list of services comprised by the service charge and the trigger for a pandemic rent suspension clause However the decision is probably as insightful for highlighting the terms the parties actually agreed should be included in the new lease in consequence of Covid, as those disputed terms the court was required to resolve. 

What was the trigger for the pandemic rent suspension clause?

It was interesting that the parties were agreed on the principle of a pandemic rent suspension clause. They also agreed that if the clause was triggered, the tenant would pay 50% of the rent (with a continuing obligation to pay the service charge in full) and to account to the landlord for any sums received from the Government by way of subsidy or support. However, the parties disagreed on what should trigger the operation of the pandemic rent suspension clause.

The tenant argued that the closure of non-essential retail should be the trigger because the burden on the tenant in staying open was actually more onerous than that on other stores in Westfield which had to close. The landlord argued that compulsory cessation of trading should be the trigger and argued that the tenant had a competitive advantage over non-essential retailers in being able to continue to trade during lockdown periods.

The Court agreed with the tenant that the trigger should be closure of non-essential retail. The Judge commented that the advantages to the tenant of being able to remain open when non-essential shops were closed in a “largely empty and echoing Westfield Centre” were more notional than real.

In reaching its decision, the Court placed great emphasis on the fact that the tenant was continuing to trade in a largely empty shopping centre. If the location had been different perhaps the Court would have reached a different conclusion. Therefore, location of the premises will clearly be an important factor in deciding what the trigger will be for pandemic rent suspension clauses going forwards.

Both parties were seeking a change to the lease terms to allow a pandemic rent suspension clause therefore there was no burden on the tenant to persuade the Court to change the lease terms to accommodate its proposal. However, the Judge commented that even if the clause was being imposed on the landlord against its will, he would have found that “essential fairness demands it”. Therefore, it seems that Courts are likely to find in favour of the tenant where there is disagreement as to whether a pandemic rent suspension clause should be included in a renewal lease. 

However, the courts only have jurisdiction to settle disputed terms, and did not comment upon the principle of the 50% rent split, so presumably this might be arguable in future cases.

Services to be provided under service charge?

The landlord sought to include changes to the service charge provisions which concerned energy related costs. The tenant argued that the costs that the landlord was seeking to include were costs which a landlord would be expected to cover. The landlord argued that the changes were merely sensible modernisation but there was nothing in the proposed new terms that was not already covered by the general “sweeper” provision contained in the existing lease. The Judge stated that that was not a sufficiently plausible reason to make the requested variation; the proposed changes would not be fair and reasonable in all the circumstances and refused to order the inclusion of them within the renewal lease. 

This following the reasoning given in the famous O’May decision; it serves as a useful reminder that there must be a good reason for the Court to impose a new term against the will of either party and the fact that the burden of proof of persuading the Court to change the terms is on the party proposing the change.

The rent payable under the new tenancy?

Having settled any disputed new lease terms pursuant to Section 35 of the Landlord and Tenant Act 1954 the Court turned to deciding what the new rent should be under Section 34(1). The court recognised the usual additional difficulty of assessing the rent at a date 3 months and 21 days after judgment (as is always required by Section 64) by reference to the evidence available at the trial date.

The case highlights the tactics inherent in timing when the renewal process; the matter commenced in 2018 and if the proceedings had been progressed far quicker, the rent for the new 5 year term would have clearly been set at a far higher level, than one set during a pandemic.

The Court applied a discount of 20% for Covid (already agreed between the parties). The landlord was arguing for a new rent of circa £714k, the tenant circa £177k and the court  settled at a  rent of circa £404k;  so significantly lower than the passing rent under the previous lease of £953k which had been set pursuant to a rent review carried out in 2013. 

In arriving at the new rent a number of interesting observations can be taken from the judgment:

  • The Court recognised that it must assume that there is a demand for the premises but acknowledged that there was no need to assume that a hypothetical bidder would pay more than a nominal rent. However, it also opined that the existence of comparables tended to make the conclusion of a “nominal rent” very unlikely Section 34(1) of the 1954 Act requires that in determining what the new rent should be, any effect on the rent of the fact that the tenant has been in occupation should be disregarded. The Court followed the narrative in Renewal of Business Tenancies by Reynolds & Clark, and various other County Court decision in concluding that the tenant was entitled to the benefit of a rent free period for fitting out. Consequently, appropriate adjustments were to be made to the comparables
  • there was quite a significant gap between the experts’ valuations. Counsel for the landlord suggested that the void between the two, ‘entailed negligence which went beyond a non-negligent margin of error.’ The Judge disagreed with this suggestion and commented that in a more normal climate there may have been negligence but that it was not surprising in the present climate that there are few good contemporary comparables. The Court commented on the rise of temporary leases or leases at turnover rents as signs of a general lack of market confidence and a lack of willingness to commit
  • The Judge referenced the generally accepted hierarchy of evidence and that there is a descending order of weight to be attached to different comparables. The best evidence will always be open market lettings
  • The Judge presumed initially that the ‘pandemic clause’ should result in an upwards adjustment to the rent payable by 10%. The Judge changed his position on that and stated that a pandemic clause has become something that all tenants want and that the market had now priced it in. Therefore, the Judge found that there was no basis for an uplift and noted that even if there was he could not with any confidence have quantified what the uplift would have been

What was the interim rent payable until the new tenancy was granted?

This case is a useful reminder of one of the exceptions to the usual position that the interim rent is normally the same as the new rent. The general position does not apply if the interim rent ‘differs substantially’ from the new rent.

It was common ground that the retail market was much firmer in October 2018 than the present day and that had the rent been agreed in 2018, it would have differed substantially from the new rent.

Consequently, the interim rent was the rent which the Court would have determined under Section 34 to be payable under the new tenancy if the new tenancy had commenced on 1 October 2018. The Court had to assess what the open market rent for the lease at that time would have been. This lead to an interim rent of £758,785 per annum.