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10th May 2021

Lease renewals amidst an ongoing COVID crisis

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In a time of such uncertainty and financial unease for both landlords and tenants, it is no surprise that, more than ever, both parties are seeking to obtain the best possible outcome when negotiating lease renewals.

In the recent case of, WHSmith (the Tenant) and Commerz Real Investmentgesellshaft MBH (the Landlord), the parties struggled to agree on two terms to be included in the renewed lease of premises in the Westfield Shopping Centre, Shepherd’s Bush. In contention were the events that would trigger the rent suspension clause, and the inclusion of a rent-free period.

Standard rent suspension clauses benefit tenants as they suspend payment of rent where part or all of the premises are damaged or destroyed by one of the insured or uninsurable risks in the lease, rendering the premises unfit for occupation or use.  The parties agreed here that the rent suspension clause would also be triggered if the government-imposed restrictions on opening of premises to prevent the spread of COVID-19.

Crucially, though, as the Tenant is categorised as an essential retailer (as it contains a Post Office) it was required to remain open, both during the first lockdown and the subsequent tier restrictions. Despite remaining open, the Tenant proposed that the rent suspension should be triggered during any period in which a non-essential retailer was ordered to close due to an epidemic or Act of Parliament. Its reasoning was that by being required to stay open and pay staff whilst suffering a 90% reduction in sales, it suffered more than non-essential retailers, who benefited from government furlough schemes.

The issue was whether it was necessary for the Tenant itself to be required to close its premises in order to trigger the rent suspension clause. Compelling evidence was given from both sides, with the Landlord arguing that a rent suspension should be triggered only if the Tenant was forced to close, and the Tenant positing that due to significantly reduced footfall in Westfield Centre, the closure of other non-essential retailers in Westfield Centre should trigger the rent suspension clause. Ultimately, the court agreed with the Tenant, concluding that the Landlord’s argument was hollow as the Tenant would not be forced to close owing to its essential status.

A further issue in the case was whether a standard three-month rent-free period should be provided for fit-out before trading can commence. The Landlord argued that a rent-free period was unnecessary as the premises were already fitted out to the Tenant’s requirements due to the Tenant’s previous tenure. However, as s.34 of the 1954 Act requires the court to disregard any tenant in occupation of the premises when considering the rent payable under a renewed tenancy, the court required the Landlord to grant a three-month rent-free period at the start of the new tenancy.

Overall, this case raises several interesting points pertinent to a COVID and post-COVID landscape: perhaps most notably, that even where a tenant is an essential retailer, they may rely on the closure of non-essential shops to trigger rent suspension clauses, and that a rent-free period to ‘fit-out’ should be given, even when renewing a lease to an existing tenant.

For further help or assistance in any commercial landlord and tenant related matters do not hesitate to contact Julian Bishop on 020 7400 6583 or click here to email him.