Commercial lease renewals and pandemic clauses

28 Jul 2021

We all know of the chaos brought to the trading conditions of the High Street (and other industries) by the pandemic, and the pressures that retailers are under; many have lost the battle to survive, and others may follow.  It is doubtful that any retail tenant signing a new lease before Covid-19 had the foresight to anticipate the pandemic and multiple national lockdowns. 
 
Now that the risks of a pandemic are known, businesses are considering whether they need to protect themselves in the contracts they negotiate going forwards.  As far as property is concerned, the Landlord And Tenant Act 1954 (“the Act”) governs the process for renewing commercial business leases which have not excluded the relevant provisions of the Act.  Many retailers, for example, will have leases which are ‘protected’ by the Act, and some will be considering whether or not to renew them.
 
If you are negotiating your first lease with a landlord then everything is up for discussion.  But what if you are a commercial tenant renewing a lease under the Act and the current lease terms do not include a pandemic clause?  Will the Court come to your rescue and include terms which help to soften the financial blow caused by a pandemic?
 
The Court can be asked to determine the terms of the new lease if the landlord and tenant cannot reach agreement.  Save for the level of rent and the length of the new lease, the general starting position is that the terms of the new lease will be broadly similar to the current one.  Whilst it is open to a party to ask the Court to include a new term in the new lease, the onus will be on that party to justify the change and explain why it would be fair and reasonable.  It could be an uphill struggle if the new clause would impose new risks on the other party.
 
In the recent County Court decision of Poundland Limited –v- Toplain Limited, the tenant was renewing its lease under the Act.  Mindful of the recent pandemic, it proposed that the new lease should include pandemic related clauses designed to reduce the risks and impact which might be caused by a future pandemic. One of those clauses proposed that the rent should be reduced by 50% in circumstances where it was unable to trade, as was the case during the recent lockdowns.
 
In refusing the tenant’s request, District Judge Jenkins decided that it would not be fair and reasonable to impose a new risk on the landlord and considered the risk to be one which the tenant ought to bear.
 
District Judge Jenkins commented, “It is not the purpose of the Act to protect or insulate the [tenant]…. The purpose is not to redesign previously negotiated risks even though a national lockdown may not have been in the parties’ minds when they did so. Although right to give consideration to the issue, it is not in my view sufficient a reason to impose a sharing of the risk in circumstances over which the [landlord] would have no control whilst the [tenant] may have some by reference to reliefs or schemes that might be available to them by the government.”
 
The case is a useful guide as to how the Courts may treat cases like this, and has no doubt been welcomed by many landlords.  However, this is unlikely to be the last case of its kind.
 
Of course the law is only one factor to consider when it comes to renewing leases; in property markets where landlords are struggling to find or retain tenants, the commercial realities might mean that more tenants are able to negotiate the inclusion of pandemic style clauses.
 

Further reading

Ganz v Petronz FZE & Goren – key decisions of the arbitration claim

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Reversal of changes to High Net Worth Individual and Self-certified Sophisticated Investor criteria implemented

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As discussed in our recent update, the government announced in the Budget that the eligibility criteria for the exemptions, which allow shares and other financial instruments to be marketed to High Net Worth Individuals and Self-certified Sophisticated Investors without the regulatory protections
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Tyne Harman outlines some of the key considerations for lenders and borrowers alike to be aware of.
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