Lease Renewals and the Lasting Effect of COVID-19
A brief update on how two County Court decisions took into account COVID-19 in lease renewals and rent terms.
As England and Wales steadily steps out of COVID-19 restrictions, there have been some interesting cases recently in relation to lease renewals under the Landlord and Tenant Act 1954 (“LTA 1954”).
S Frances Ltd v The Cavendish Hotel (London) Limited, 18 June 2021
The case of S Frances Ltd was recently heard in the County Court and HHJ Parfitt considered COVID-19’s impact on rent in lease renewal proceedings under the LTA 1954. The tenant occupied a premises on Jermyn Street in London and it had been previously determined by the courts in 2018 – all the way up to the Supreme Court – that the tenant had a right to new leases of the premises. Although the parties had agreed the majority of the terms of the new leases, the rent remained in dispute.
Due to the COVID-19 pandemic, rent valuation experts have faced difficulties in assessing how much rent should be payable as there are many fewer letting comparables than usual. The Royal Institution of Chartered Surveyors provided guidance for valuers and suggested a “standing back and feels about right” approach, assessing the new rent compared to the old rent in the round, looking at all of the circumstances of the valuation. The Court took into account this approach and found that even valuing based on ‘zoning’ in the traditional way and then looking at it “stood back”, an annual rent of £102,000 would be appropriate in a post-COVID world. Previously, the annual rent had been (albeit on a slightly artificial hypothetical basis rent review) £220,000.
The decision of HHJ Parfitt demonstrates the very significant effect that the COVID-19 pandemic has had on rental values and how the court is approaching valuation of rental properties.
Poundland Ltd v Toplain Ltd, 7 April 2021
The case of Poundland Ltd was also recently heard in the County Court in front of DJ Jenkins. The tenant, Poundland Ltd, proposed to include a clause within the renewal lease, widely nicknamed a ‘pandemic clause’. The proposed pandemic clause set out that in the event of a government-imposed lockdown, the rent and service charge payable would be reduced by 50%. Poundland argued that the inclusion of such a pandemic clause would reasonably modernise the lease. The landlord, Toplain Ltd, however, did not agree to the pandemic clause, as there was no market precedent for this type of clause and the clause would fundamentally alter the parties’ relationship.
DJ Jenkins agreed with Toplain and found that the imposition of the pandemic clause would not be fair and reasonable in the circumstances. It was considered to be unreasonable to impose risk on the landlord in circumstances that they had no control over, such as a government-imposed lockdown. The tenant, however, would have a certain degree of control over their situation, through government schemes and reliefs that were afforded during national lockdowns. DJ Jenkins further commented that the LTA 54’s purpose was not to re-write previously negotiated risks, even though the parties would not have predicted a national lockdown at the time of the original lease negotiations.
Although in the case of WH Smith Retail Holdings Limited v Commerz Real Investmentgesellschaft GmbH, on 25 March 2021 a pandemic clause was inserted, the Court then was only asked to determine the mechanics of how the clause would operate as the parties had already agreed that the clause would be inserted into the renewal lease. Therefore, although Poundland sought to rely upon this case in support of their proposal, the cases were differentiated on the basis that a pandemic clause had not been agreed in the current case.
Poundland also proposed varying the forfeiture clause in the existing lease, to provide that the landlord could not forfeit the lease during a government-imposed lockdown. DJ Jenkins also rejected this proposal, as it would significantly alter the commercial balance between the parties.
Although both of the S Frances Ltd and Poundland Ltd cases were heard in the County Court and, therefore, do not have a binding effect on future cases, they provide interesting examples of how the COVID-19 pandemic continues to affect lease terms and, in particular, rents.