Business tenancy renewals and the pandemic - WH Smith v Commerz
What impact has the pandemic had on the way the Courts approach non-contested lease renewals? What view do they take of the suggestion that the new tenancy should contain an effective pandemic rent suspension clause? What approach are the Courts taking to the overall impact that covid has had on rents in the retail market? And what is the relationship between this impact, and the fact that pandemic rent suspension clauses have already become the market norm? Property law practitioners interested in these questions will find this case of considerable interest, because it decides that pandemic rent suspension clauses should be drafted so as to be effective, rather than so narrow they don’t really work; and that, as the presence of such clauses is the new norm, it does not require an upwards adjustment in the rent as compared with pre-covid comparables without such clauses. Greville Healey acted for the Claimant tenant, and Mark Wonnacott QC acted for the landlord, the owner of Westfield.
WH Smith’s lease of its unit in Westfield Shepherds Bush was up for renewal. By the time the trial came on, in November 2020, the country was in the second lockdown. Non-essential retail units were all closed, again, but the WH Smith unit contained a post office, which counts as essential under the regulations, so the shop was not required to close, and it stayed open. However, sales were down by over 90%.
By the beginning of the trial the terms of the lease were largely agreed, including that the lease should contain a pandemic rent suspension clause. However, the parties disagreed over what the trigger for that rent suspension should be. The landlord contended that the trigger should be the tenant being compulsorily required to cease trading from the premises. The tenant wanted the trigger to be other, non-essential, retailers being required to close – as had actually happened during lockdown.
The parties also disagreed about the rent. The passing rent was £953,000 pa. The landlord contended for a rent of £751,999 pa., and the tenant for a rent of £146,300 pa. As the Judge observed, given the then current lack of confidence in the direction of the retail market, it was perhaps not surprising that there was such a gulf between the valuations of the two experts.
Two questions of wider relevance arose in relation to the rent:
(a) The parties disagreed over whether to treat the first three month’s rent free fit out as an incentive, to be devalued along with other incentives, when adjusting the various comparables to arrive at a Zone A rate.
(b) The parties’ experts agreed that there should be a 20% discount to allow for the impact of the pandemic on the relevant rental market, but the landlord argued there should be a 10% uplift in the rent to reflect the benefit to the tenant of having a pandemic rent suspension clause, which would in effect have clawed back half the agreed covid-discount.
HHJ Richard Parkes QC handed down judgment on 25 March 2021. On the question of the trigger for the pandemic rent suspension clause, the Court agreed with the tenant, and decided that the trigger should be the wider enforced closure of non-essential retailers, rather than the closure of the tenant itself. The Judge explained that the landlord’s proposal was effectively empty, because circumstances are most unlikely to arise in which the landlord’s trigger would be activated. As it contained a post office, WH Smith’s shop had not been forced to close in the lockdowns to date, and there was no reason to suppose that would change if there were to be further lockdowns.
On the rent, the Judge considered the various comparables, the level of demand in the centre, and the state of the wider retail rental market, and decided on a Zone A rate of £139.54, giving an annual rent of £404,666. In arriving at this Zone A rate, Judge decided that:
(a) the tenant was right to treat the first three month’s rent free fit out as an incentive, to be devalued along with other incentives;
(b) and the tenant was right that there should be should be no uplift in the rent to reflect the benefit to the tenant of having a pandemic rent suspension clause, for two related reasons.
The first was that the Covid discount and the pandemic clause are not providing for the same thing. The Covid discount reflects a consensus about the general fall in the rental market; whereas the pandemic clause is an attempt to share the burden of the loss caused by the impact of compulsory closure of non-essential retailers, which is a loss beyond the general impact of Covid.
The second was that a pandemic clause has become something that all tenants now expect, and that the market has now priced it in.
Conclusion: Wider interest
For property law practitioners who deal with business lease renewals, and commercial leases in general, the following points will be of wider interest.
First, it illustrates that all tenants now expect a pandemic rent suspension clause, and that has become the new market norm.
Second, it decides that this is not something for which tenants will pay extra, thereby handing back to their landlord some of the benefit of the overall drop in rents caused by the pandemic.
Thirdly, it decides that, in the case of a tenant which will not be forced to close, because it falls within one of the exceptional categories, but which will nevertheless become unprofitable when other non-essential retailers are forced to close, the trigger for the rent suspension should be the wider closure of non-essential retail, not the forced closure of the tenant (which does not happen).
Fourthly, it is the latest in the line of County Court decisions to decide that, in contrast to the position in rent review cases, in lease renewals the first three month’s rent free fit out should be treated as an incentive, to be devalued along with other incentives.
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