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

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.

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.

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.

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.

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.

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.