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‘New Normal’ Commercial Rents8 July 2021

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The renewal of commercial leases is a rare area of law in which Courts can be asked to decide the commercial terms of a contract and the price. How the Court goes about these tasks is well-established by the Landlord and Tenant Act 1954 (“the Act”) and a large and well-established body of caselaw.

However, the Covid-19 pandemic has required the Courts to grapple with novel questions and this article explores some of the most impactful decisions on contractual risk allocation and valuation.

Demand for rent suspensions and reductions

"The Court treated the pandemic, restrictions imposed in response to it and Government relief schemes as circumstances relevant to the determination of the terms of a renewal tenancy."

During the Covid-19 crisis tenants have demanded new rent suspension clauses in lease renewals to reduce or negate rent payments where lockdowns and restrictions prevent or constrain their use of commercial premises. They have also pushed for reduced rents, particularly in relation to tenancies of retail stores and hospitality premises.

This has led to a flurry of recent cases which advance the law in relation to the Act and provides useful lessons for commercial landlords and tenants.

Existing law

A tenant in business occupation of premises is entitled to a new tenancy unless its lease contracted out of the security of tenure provisions of the Act. The parties are free to negotiate the terms of that renewal. If they are unable to agree some or all of the terms, sections 32 to 35 of the Act provide that the Court decides them by reference to the existing provisions of the lease. A landlord or tenant wishing to depart from an existing term must justify the change as fair and reasonable in the circumstances. The Court then sets the rent if it cannot be agreed with the assistance of expert valuation evidence as to the market rent for those terms.

Should a new pandemic rent suspension clause be granted?

This question was the subject of the recent case of Poundland v Toplain¹. This concerned Poundland’s store on King Street, a popular retail high street in Twickenham.

District Judge Jenkins delivered the answer in this pithy comment: “It is not therefore the purpose of the legislation (and so the court in exercising its discretion) to approve (opposed) amendments to the lease which would result in a change to the respective risks, obligations and benefits carried and enjoyed, nor to insulate the tenant against the commercial and trading risks they may face in a way that would either prejudice the landlord or interfere with their long term interests”.

The Court treated the pandemic, restrictions imposed in response to it and Government relief schemes as circumstances relevant to the determination of the terms of a renewal tenancy. However, DJ Jenkins said that the Act granted the tenant security of tenure to continue its business. It was not designed to protect the tenant against the commercial impact of circumstances over which the landlord had no control. Similarly, the Court refused Poundland’s request to vary the landlord’s forfeiture right so that it could not be exercised during a lockdown period.

"The judge said that the “tenant’s cash flow is a matter entirely for the tenant” and that it would be unfair and unreasonable to move the burden of this commercial risk onto the landlord."

By parity of reasoning, the Court also rejected the tenant’s application for rent to be paid in arrears (as opposed to in advance as per the existing lease). The judge said that the “tenant’s cash flow is a matter entirely for the tenant” and that it would be unfair and unreasonable to move the burden of this commercial risk onto the landlord. In doing so, the Court was quick and decisive in rejecting the tenant’s justification for this proposed change. Poundland had said that the proposed clause is the tenant’s standard requirement for new and renewal leases across its portfolio. DJ Jenkins said: “I do not accept the argument that the tenant’s portfolio position is a relevant circumstance”. This will come as a blow to large national retail chains who commonly point to their internal policy as the apparent rationalisation for the imposition of new or varied terms on landlords.

When should a rent suspension be triggered?

WH Smith v Commerz Real (2021) concerned the lease renewal of the WH Smith store (which, significantly, included a post office) at Westfield Shopping Centre in Shepherds Bush. By the time of the trial, the landlord had already agreed that 50% of the rent should be suspended in the event of store closure due to a pandemic. In turn, the tenant had agreed that it would account to the landlord for any government subsidy or support for rent.

The key battleground was not whether the pandemic rent suspension clause should be included in the lease, but the circumstances in which that rent suspension should be triggered.

The landlord said that rent should be reduced by 50% only if the tenant was compelled to cease trading at the Westfield store. The tenant essentially characterised the landlord’s proposed rent relief as an empty gesture.

WH Smith operated a Post Office at the store which was designated an essential retailer permitted to continue trading during national lockdowns and local restrictions. WH Smith’s loss was not due to its own closure, but that of other stores at Westfield Shopping Centre. For instance, significantly less footfall at the mall saw revenue during the March to June 2020 lockdown fall by 92% year-on-year. Therefore, WH Smith argued that the rent abatement should apply where non-essential retailers would not be able to open the store.

Judge Richard Parkes QC accepted that trading conditions in a shopping centre compared to the high street were different during pandemic restrictions. Accordingly, it agreed to the tenant’s proposed trigger for the rent suspension.

The impact of Covid-19 on rent (and the importance of persuasive valuation evidence)

"Judge Richard Parkes QC accepted that trading conditions in a shopping centre compared to the high street were different during pandemic restrictions. Accordingly, it agreed to the tenant’s proposed trigger for the rent suspension."

These cases might give the reader the false impression that the Courts invariably side with landlords in relation to the impact of an unforeseen change in circumstances. The judgment in S. Franses Limited v The Cavendish Hotel (2021)² serves as a salutary tale, particularly regarding the preparation and presentation of expert valuation evidence.

S Frances was an antique tapestry and textile art dealer with a showroom and offices on the junction of Jermyn Street and Duke Street in London. The parties had agreed that the new tenancy should be for 15 years with five yearly rent reviews. The Court was asked to determine the starting rent. The passing rent under the existing tenancy was £220,000 per annum.

Experts for both the landlord and tenant agreed that the Covid-19 pandemic had caused a substantial reduction in value in the Jermyn Street rental market. HHJ Parfitt conducted a detailed analysis of their expert evidence and was critical of both sides.

He considered an approach to a key comparable property as “essentially worthless” for the tenant (which he characterised as “gut instinct”). He also disapproved of the “sleight of hand” involved in trying to make the property look like credible evidence.

However, the expert valuer on behalf of the landlord appears to sustain the most censure. He accepted that the surveyor was “a landlord-favouring expert” who had “overplayed his hand for the [Landlord’s] benefit” in all his reports. This had not been counteracted by an otherwise balanced and reasoned approach. For instance, his evidence referenced his firm’s market report in support of recovery to pre-pandemic levels in 2022, when the report itself presented the opposite picture of a pandemic which had “savaged an already weak UK high street”. The judge also described the expert’s evasiveness and defensiveness during cross-examination as “unfortunate”.

Taking account of the evidence that he considered credible and “bearing in mind the unique circumstances which provide the market context for this valuation”, the judge decided that the rent would be £102,000.

Whilst the case superficially demonstrates a severe drop in the passing rent in that local market due to the pandemic (from £220,000 to £102,000), the lesson for expert valuers is significant and enduring. They need to take an even-handed clinical approach to the valuation exercise if they are to persuade a judge.

[1] Thank you to Falcon Chambers and particularly Cecily Cramplin (who acted for the landlord Toplain) for drawing my attention to this case.
[2] Thank you to Wilberforce Chambers and particularly Joanne Wicks QC (who acted for the tenant S Frances) for drawing my attention to this case.

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