Pandemic Clauses: sharing (risk) is not (necessarily) caring (Poundland Limited v Toplain Limited)

Facts

The tenant (Poundland Limited) and landlord (Toplain Limited) were in the process of an uncontested business tenancy renewal, with proceedings issued in the Brentford County Court under the Landlord and Tenant Act 1954 (“the 1954 Act”) for the terms of the new lease to be decided by the Court.

Immediately prior to the trial, the parties settled on an annual rent of £130,000 for a five-year lease with no break clause. However, there were a number of terms that still had not been agreed, including the question of whether to include a rent reduction pandemic clause.

Relevant law:

Section 35 of the 1954 Act enables a court to determine the terms of a new lease where parties cannot agree. As part of that determination, the Court shall ‘have regard to the terms of the current tenancy and to all relevant circumstances’. District Judge Jenkins added during the course of judgment that it was appropriate to include the effects of both past and future lockdowns in the wake of Covid-19 within the consideration of ‘all relevant circumstances’.

O’May v City of London Real Property Co Ltd (1983) is the leading authority on approaching the question of whether to include a new term within a renewal lease under the 1954 Act. O’May established that the party seeking a new term is obliged to ‘justify the change’ and demonstrate why it is fair and reasonable, rather than relying on the Court to amend leases based on its general discretion.

Arguments:

Among the list of proposed terms for the new lease, the tenant wanted to include a 50% rent and service charge reduction during any government-imposed lockdown event, claiming that this would ‘modernise’ the lease in the wake of Covid-19. Including this term would also supposedly reflect both parties’ interests in enabling the tenant to continue trading from the premises.  The tenant relied particularly on the recent case of WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellshaft MBH (2021) in support of its position, which saw detailed discussion of what constitutes an appropriate trigger event for pandemic clauses.

In contrast, the landlord submitted that there was no market precedent for pandemic clauses to be routinely included within renewal leases.  It also pointed out that such clauses fundamentally alter the landlord-tenant relationship, by displacing what would otherwise be a short-term commercial risk carried by a tenant onto the landlord.

Court’s decision:

The Court rejected the tenant’s request for the insertion of a pandemic clause, emphasising that its power to determine renewal lease terms was not so that one party could ‘redesign previously negotiated risks’. In the Court’s opinion, the tenant’s evidence was insufficient to demonstrate why the proposed term was fair and reasonable, highlighting that the landlord would have no control over the circumstances whereas the tenant would potentially have some recourse through using government reliefs or schemes.

The Court also noted that the facts of this case differentiated from those in WH Smith, where parties had already agreed that a pandemic rent suspension clause should be included in the lease and were seeking a decision solely on the mechanics of such a clause.

The Court also rejected other terms proposed by the tenant including:

• exempting the tenant from complying with insurance requirements during any lockdown period; and
• prohibiting the landlord from forfeiting during a lockdown period.

The basis of the Court’s rejection of the terms also centred on the uneven distribution of risk that these clauses would create within the landlord–tenant dynamic.  The District Judge commented:

“It is not...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.”

However, the Court agreed to order the insertion of a MEES clause to clarify the responsibility for compliance with those rules.  The new clause confirmed that the landlord (if required by the regulations) would meet the costs of any works to bring the property up to the relevant efficiency standard.

Comment

Although this decision will not be binding precedent, landlords will be relieved to see courts maintaining the current balance of risk between parties to a lease. Perhaps most interestingly, a common theme running through the judgment was a focus on the risks naturally inherent to each party’s position. The District Judge made it clear that there are always burdens to be borne by both landlord and tenant and this judgment seeks to ensure that such burdens are not skewed disportionately, pandemic or not.

This article was written by Emma Humphreys and Emily Smith. For more information please contact Emma, Emily or your usual Charles Russell Speechlys contact.