Business Lease Renewals

The impact of Covid-19 is still being felt all around the Country as it continues to disrupt businesses and our economy. Although with restrictions starting to ease, there may be light after the tunnel.

Despite the government providing some assistance to many businesses, our economy has witnessed several, possibly 100s, of closures, be it from your favourite eat in deli, to your friendly neighbourhood café to the quaint hotel tucked into the corner in your favourite get away village.  

Whilst some businesses have accepted defeat, others are fighting to survive, and some have taken to the legal system to ensure longevity – it is survival of the fittest.

The case

A recent judgment was handed down after a four-day hearing in Winchester County Court, November 2020, whereby WH Smith Retail Holdings Ltd (“the Claimant”) made an application for a new tenancy of retail premises in the Westfield Centre, Shepherds Bush (“the premises”) – such application went unopposed. Although, the hearing took place during the second national lockdown, the Claimant was able to continue its trade as the premises concerned contained a post office that was classed as ‘essential trade’ under the Coronavirus regulations. The judgment gives detailed consideration to the impact of the pandemic on commercial property leases and rental valuation and is a constructive reminder that pandemic rent suspension clauses may become the norm within the market and that the interim rent is not always the rent payable under the renewal lease – it may be higher or lower if the market changes considerably.

 The Claimant, a household brand in the UK, brought the case against Commerz Real Investmentgesellschaft mbH (“the Defendant”), the landlord with long leasehold interest in the premises.

The Claimant served on the Defendant a s.26 notice under the Landlord and Tenant Act 1954 (the “Act”), requesting a renewal lease to commence on 23 March 2018.

Both parties agreed that the renewal lease should contain a pandemic clause, however, each party disagreed over the trigger for that clause.

The Claimant contended that the trigger should be when other non-essential trader were forced to shut, whereas the defendant contended that the trigger should be when the claimant was required to shut.

There was also a huge disparity as to the rent payable during the closure period, with the claimant stating it should be under £150,000 per annum and the defendant claiming it should be £751,999 per annum.

A further matter before the court was that of whether a rent-free period of three months for fit out should be devalued, as typically, incoming tenants are normally offered a rent-free period, on average 3 months, as an inducement to allow for fit-out before trading can commence. It was argued that this should also apply to a renewal.

Decision

The Court held:

1. The judge carried out a site visit in mid-November 2020 and noted that Westfield Centre was ‘largely empty’. It was held that the pandemic rent suspension clause should be activated in line with the claimant’s proposal, namely on the closure of non-essential retailers. It was evidenced that despite being able to continue to trade, the closure of other non-essential retailers had a significant impact on footfall which of course affected the claimant’s business.
2. The new rent was set at £404,666 per annum, factors such as the impact of the pandemic on the wider retail market was considered.
3. No uplift in rent should be made for the inclusion of a pandemic rent suspension clause. The judge held that this is something all tenants want, and the market has adapted to reflect this.
4. Taking into consideration the absence of a rent-free period for fitting out, the comparable evidence should be adjusted. Although, by renewal stage, many tenants already within the premises and trading, would be fitted out. The claimant’s own occupation is to be disregarded under the Act and if the Defendant was agreeing new terms in the open market with a new incoming tenant, then those terms would include a rent-free period for fitting out.
5. The market was “much firmer” in October 2018, and as the pandemic changed the market “substantially”, interim rent was therefore not the rent payable under the renewal lease, as is usually the norm, but rather, payable at a higher rate from the interim start date which was agreed to be 1 October 2018 until the new tenancy is granted.