The effect of pandemic rent suspension provisions on commercial leases
In WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellschaft mbH , the claimant tenant’s lease of retail premises in London’s Westfield shopping centre was due to be renewed. During the pandemic lockdown of November 2020, non-essential retail units were closed but the claimant’s unit remained open as it contained a Post Office counter, classed as an essential service. Sales dropped by over 90%.
At the commencement of the lease renewal trial hearing, the parties had agreed the terms of the lease and had incorporated a pandemic rent suspension provision but disagreed over the circumstances which would trigger such a suspension. The landlord argued that this should be a compulsory order to cease trading, whilst the tenant argued that the trigger should be other non-essential retailers being ordered to close, as had occurred in this case.
The rent was also in dispute. There was a considerable difference between the parties; the landlord argued a rent of £751,995pa, whilst the tenant argued £146,300pa. Again, the pandemic’s impact on the retail sector was the cause of the difference in valuations. Experts on both sides agreed a 20% reduction as a result of the pandemic’s impact, but the landlord argued for a 10% uplift to represent the benefits of the rent suspension clause, diluting the agreed reduction.
The County Court found in favour of the tenant, agreeing that the rent suspension clause should be triggered by the closure of other non-essential retailers in the centre rather than the forced closure of the tenant’s own operation. The tenant’s business is unlikely to be forced to close due to its Post Office counter, and this model would be the most likely to be followed during any other pandemic-related lockdowns.
The rent was decided at a sum of £404,666 following consideration of comparable rents, centre demand and the general retail market. The landlord’s 10% rent suspension uplift was refused. The 20% reduction in the rent reflected wider market trends in the retail sector, whilst the rent suspension clause spreads the burden of losses sustained by both parties where retail stores are ordered to close. All tenants are now arguing for pandemic rent suspension provisions, and landlords are pricing this into their rents.
Advice and action for landlords
Landlords are undoubtedly going to face requirements from tenants to include pandemic rent suspension provisions in leases going forward, particularly from retailers. This case supports that position, but notes that landlords are likely to price such provisions into rents going forward.
Rent suspension provisions must be effective, and in this case that meant allowing for the clause to be triggered where other non-essential retailers are required to close, rather than only allowing for a trigger where the tenant itself must close.
The County Court found in favour of the tenant, agreeing that the rent suspension clause should be triggered by the closure of other non-essential retailers in the centre rather than the forced closure of the tenant’s own operation.