Commercial leases emerging from Covid-19: pandemic clauses and rent arrears

Covid-19 has affected our businesses and led to an increased number of disputes followed by court proceedings and some interesting judgments, writes Chi Collins of Greenwoods GRM.

Commercial lease renewals

Under the statutory renewal process of a commercial lease under the Landlord and Tenant Act 1954 the Courts can be asked to decide the terms of the lease in situations where the parties are unable to agree.

During the pandemic tenants have pushed for rent suspension clauses, rent reductions and even rent negations.

In the recent case of Poundland v Toplain, Poundland (the tenant) argued for insertion of the so-called ‘pandemic clauses’, including the following variations:-

50 per cent reduction in the annual rent and service charge during any future lockdowns that are imposed by the government
A clause relieving the tenant from complying with its insurance obligations during a lockdown
A clause preventing the landlord from forfeiting the lease during a lockdown.

The tenant relied on the recent case of WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellsharft MBH [2021], arguing that pandemic clauses are ‘fair and reasonable’ and should be added to the terms of a renewal lease to protect the tenant during future lockdowns.

The landlord opposed the pandemic clauses, argued that there is no market precedent and that such clauses would reallocate the tenant’s short-term risk on to the landlord.

The Court decided against the tenant and differentiated the WH Smith case as not considering the question of whether to include the pandemic clauses in the lease was fair and reasonable but instead what a sufficient triggering event for already agreed pandemic clauses would be.

In the WH Smith case, the parties had already agreed to a 50 per cent reduction in rent if the tenant was compelled to cease trading. The Court followed the guidance in O’May v City of London Real Property Co Ltd [1983] where it was decided that the courts should not use their discretion to change the terms of a lease on renewal.

Certainly there is scope for the inclusion of pandemic clauses in future lease renewals, where the parties have already agreed to insert such clauses upon renewal of a lease or are negotiating a brand-new lease.
However, in the absence of such agreement, pandemic clauses are unlikely to be inserted into a renewal lease just because the tenant requires them.

Rent arrears

Recent decisions of the High Court point to the direction that tenants will be ordered to pay the rent they had failed to pay during the pandemic.

The Court in both Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] and Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] concluded the following.

The Code of Practice for commercial property relationships during the Covid-19 pandemic is a voluntary code and not a charter for tenants declining to pay their rent.

The landlords’ insurance would only cover the named risks in the lease and that its purpose is to protect the landlords’ interests, not their tenants’. The landlords would still have to pursue the tenants for payment of rent arrears before claiming under the policy. In addition, the meaning of ‘damage’ within the rent suspension clauses only applied to physical damage of the premises.

The Court rejected the argument of frustration as the tenants had been able to trade intermittently during the pandemic.

In all cases the Court granted the landlords’ application for summary judgment on the basis that the tenants had no real prospect of success in defending the claims.

The moratorium on forfeiture and rent recovery is now extended until 25 March 2022 and the Government released a policy statement introducing binding arbitration in respect of rent arrears arising out of the Covid-19 pandemic.

The proposed arbitration scheme remains unclear and vague and even though this policy statement tries to give a direction of where things are going, it raises more questions than it answers. The key will be in the detail and it will be interesting to see the scope and objectives of the proposed procedure.

What is obvious is that the requirement for the parties to negotiate over ring-fenced rent arrears will play an important role in the scheme.