Rent suspension clauses and business lease renewals

Background

WH Smith occupy a unit in the Westfield Centre under a ten-year lease with a rent of £953,000 a year. WH Smith served a section 26 notice in March 2018. Interestingly, the unit contained a Post Office counter and was therefore classed as ‘essential retail’. So, although the unit was allowed to open, the ‘non-essential’ retailers in the rest of the centre had to close, which had a negative impact on footfall and subsequently on sales (which decreased by 90%).

The lease

While the draft lease (which included a pandemic rent suspension clause) was agreed, the parties could not agree “the rent payable under the new tenancy, the list of services comprised by the service charge, the trigger for a pandemic rent suspension clause, and the interim rent payable until the new tenancy is granted”.

The landlord argued the pandemic rent suspension trigger should only apply if WH Smith could not trade at all. WH Smith argued the trigger should be the shutdown of non-essential retail because the burden on WH Smith staying open was onerous. The court ruled that “the landlord’s proposal is effectively empty, because circumstances are most unlikely to arise in which the landlord’s trigger would be activated”.

While this is a county court decision the case should help tenants negotiate the terms of any pandemic rent suspension clause on realistic terms, but it should also be noted that the case did not make any determination on the principles of O’May v City of London Real Property [1982]. The court did comment that rent suspension clauses are currently the norm so this may assist a party in lease renewal negotiations but it is not clear this would be enough to persuade the court that such a clause should be included if this is not agreed.

Finally, there was a large gulf between the parties on rent. The landlord suggested £751,995 per annum whereas the tenant proposed £146,300 per annum. The landlord argued unless the tenant was required to remove its fit out at the end of the term, there would be no reason for the landlord to offer any fitting out concession, and the comparable evidence should not be adjusted to take account of the absence of a rent-free period for fitting out. Also, it argued and that a 10% uplift should be applied to account for the inclusion of a pandemic rent suspension clause. WH Smith argued the opposite.

The ruling

The court ruled in WH Smith’s favour and commented that the “pandemic clause has become something that all tenants want, and that the market has now priced it in” and as such, no uplift in the new rent should be applied. The court also held the three-month rent free fit out should be treated as an incentive and the comparable evidence should be adjusted. The new rent was to be £404,666 per annum.

On the question of interim rent the court ruled in favour of the landlord and determined that in this case the interim rent was not the rent payable under the renewal lease (but instead, a higher rate from the interim rent commencement date on the basis that that “the retail market was much firmer in October 2018 than it is today” and “had the rent been agreed at that time, it would have differed substantially from the new rent”).

Commentary

It will perhaps be harder in future for landlords to resist pandemic clauses in the negotiations of new leases. This decision also highlights the court’s pragmatic approach in considering the pandemic’s effect on the retail sector (which hopefully would also apply to other hard-hit sectors such as leisure) and how to treat comparables in a changing market.