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Commercial lease terms following COVID-19: WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH

23 Apr 2021 | 1 minute read

The recent case of WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH [2021] provides useful insight into the impact of the COVID-19 pandemic on unopposed commercial lease renewals under the Landlord and Tenant Act 1954 ("the Act"). This case is well worth a read for practitioners in commercial property matters who will know that unopposed lease renewals very rarely go to trial and when they do give some interesting insight.

Please click here to see the judgement itself.

Background

WH Smith Retail Holdings Limited ("WH Smith") was the tenant of a retail unit in the Westfield Shopping Centre in London. WH Smith occupied the shop under a 10 year lease which expired on 1 October 2018 after which point WH Smith held over under the Act. WH Smith served a Section 26 Request under the Act on its landlord, Commerz Real Investmentgesellshaft MBH ("Commerz"), on 23 March 2018.

At trial, the County Court considered the disputed terms of the new lease.

Issues raised

1. Trigger for pandemic rent suspension

The parties agreed that the new lease should include a pandemic rent suspension clause, however, they could not agree on when this clause would be triggered. WH Smith’s position was that the clause should be triggered if non-essential retailers had to close. Commerz argued that WH Smith had been able to continue trading (on account of the fact that the shop also contained a Post Office) and that therefore the clause should only be triggered if WH Smith had to close.

2. Rent

The passing rent under the current lease was £953,000 per annum. Commerz wanted a rent of £751,995 per annum against a rent of £146,300 per annum proposed by WH Smith.

The parties also disagreed in respect of the relevant consideration when evaluating valuation evidence. In particular, Commerz contended that a 10% uplift should be applied to the annual rent to reflect the inclusion of a pandemic rent suspension clause and WH Smith argued that comparable evidence should be adjusted to take account of the absence of a 3 months’ rent-free period for fitting out.

3. Interim rent

The Court also went onto consider how interim rent should be calculated in this case. It was common ground that the retail market was much stronger in October 2018 than at the time of trial, and that had the rent been agreed at that time, it would have differed substantially from the new rent under the new lease.

Decision summary

1. Trigger for pandemic rent suspension

The pandemic rent suspension clause should be triggered when non-essential retailers had to close, not only if WH Smith had to close. This was based on the fact that whilst WH Smith had been able to remain open, the other units in the shopping centre had to close and this had significantly reduced footfall.

Further, the Court found that it was unlikely that Commerz’s suggested trigger would ever actually arise given that the unit contained a Post Office which had not been closed at any point throughout the previous lockdowns.

2. Rent

The rent payable under the new lease should be £404,666 per annum.

In determining the rent, the Court did not apply a 10% uplift to reflect the inclusion of a pandemic rent suspension clause as such clauses were now common in the open market.

The Court also decided that comparable evidence should be adjusted to take account of the absence of a 3 months’ rent-free period for fitting out. Under the Act the Court should look at the position as if the landlord was agreeing terms with a new tenant and the Court determined that such terms would include a rent-free fitting out period.

3. Interim rent

The Court decided that the COVID-19 pandemic had substantially changed the market and that therefore the interim rent should be determined based on what the rent would have been if the new lease had started on the day interim rent became payable. This actually resulted in WH Smith being required to pay a higher rate for interim rent of £758,785 because the market conditions were much better in 2018.

Conclusion

This is one of the first of many cases where the impact of the COVID-19 pandemic will have been felt. It sheds light on how the Courts are likely to view pandemic rent suspension clause (albeit only in the context of the parties agreeing in the first instance that such a clause should be included) and what relevant factors will be taken into consideration when determining rent.

It also indicates that the Courts will take the view that the COVID-19 pandemic will trigger an exception to the usual position on interim rent.