I am negotiating a lease renewal with my landlord under the Landlord and Tenant Act. Can I insist on the inclusion of a ‘Covid clause’, since I’d be seeking one if I was looking at taking a new lease elsewhere?
One side-effect of the Coronavirus pandemic has been a raft of contested business lease renewals under the Landlord and Tenant Act 1954.
Obviously, our advice would always be to try to agree lease terms on a renewal without having to resort to the Courts. You can argue that it will be in the landlord’s interest to include such a clause as it will make your business more viable.
Where there have been County Court cases coming through they have been a mixed bag from a tenant’s perspective.
A favourable case for tenants is WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellschaft mbh (March 2021). This concerned WH Smith premises at the Westfield shopping centre in Shepherd’s Bush, London. The landlord and WH Smith had actually agreed that the renewal lease should include a so-called Covid clause, providing that the rent should be suspended in the event of a further lockdown. These clauses have become common (usually in side letters) where a landlord has been sympathetic to the problems of its tenant and has given it a concession.
Here the parties were arguing over what would be the trigger. The landlord argued that it should only be if WH Smith itself was required to close. WH Smith had a problem because it was an essential retailer and ran a post office in its store. It was never likely that government restrictions would force it to close and yet all the other shops around it which were non-essential retailers were closed in previous lockdowns. The resulting lack of footfall in the shopping mall led to a 90% drop in sales for WH Smith even though they had to keep open.
The Judge ordered that the new lease should include a rent suspension clause where there would be a 50% reduction in the annual rent if non-essential retailers were closed. WH Smith would have to continue paying the service charge however.
A tenant had his argument for inclusion of a Covid clause rejected in Poundland Ltd v Toplain Ltd (April 2021). The Judge declined to include such a new clause in the renewal lease and went back to the old arguments in O’ May v City of London Real Property Co Ltd (1983). O’May is the key case on when new clauses can be introduced into a renewal lease under the 1954 Act. It is not normally viewed as fair or reasonable for clauses to be introduced that change the balance of risk by imposing new obligations on either the landlord or the tenant.
The Judge considered that it was not fair to impose a sharing of risk on the landlord whereby the landlord would be out of pocket if there was another national lockdown. The risk had to sit with the tenant and it would fundamentally alter the commercial balance between the parties if a proportion of this trading risk were to be transferred to the landlord. The tenant may be able to offset the risk by accessing government reliefs or schemes but the landlord couldn’t.
This can be distinguished from the WH Smith case, since the Judge there was not actually going so far as to order the inclusion of a Covid rent suspension clause: he was simply determining the specifics of the mechanism by which it would work in a tenant friendly way. In WH Smith, it was common ground between the landlord and tenant that the renewal lease should have such a clause.
So, although it could be argued that Covid rent suspension clauses have become the market standard in retail leases, the guidelines in O’May make it unlikely that a Court would order inclusion of such a clause in favour of a tenant if opposed by the landlord. Maybe it will be possible for a tenant to convince a Court to make such an order; we will have to wait and see.