COVID rent suspension clauses – A Tale of Two Cases

Following the recent case of WH Smith and Commerz Real Investmentgesellshaft MBH, it seemed that courts would impose pandemic rent suspension clauses more readily. However, this was not the case in Poundland Limited v Toplain Ltd (“Poundland“).

The WH Smith case

The WH Smith case involved the proposed inclusion of a pandemic rent suspension clause (“COVID-clause”) on a lease renewal under the Landlord and Tenant Act 1954 and in particular the trigger event for that clause. The Court in this case held that, where a commercial tenant is an essential retailer, it could rely on the closure of other non-essential shops to trigger a pandemic rent suspension clause. It suggested that tenants vying for a COVID clause on a lease renewal would get their wish.  Poundland is a useful reminder that this is not necessarily the case. Whilst non-binding, as a County Court case, Poundland reiterates the age-old battle between commercial landlords and tenants, amplified by the current dystopian, post-pandemic market.

Poundland – the issues

Whilst a reduced rent of £130,000 per annum was agreed between the parties, the tenant was not satisfied by all of the proposed renewal terms.  The tenant sought to add and remove various terms of the lease, most of which were ultimately refused by the Court. These included a COVID-clause and suspension of the landlord’s right to forfeiture in a lockdown. Coincidentally, whilst the court refused the latter, section 82 of the Coronavirus Act 2020 partially achieved this by preventing commercial landlords from evicting tenants for non-payment of rent until 25^th March 2022.

The proposed COVID-clause would have reduced the rent and service charge payable by Poundland by 50% during lockdowns. Its rationale was to ‘modernise’ the lease by adapting it to exist in a lockdown world. However, the landlord stated that there was no such market precedent for a COVID-clause, and its introduction would constitute a fundamental change in the parties’ relationship. The court agreed, arguing it unfairly shifted part of the tenant’s risk onto the landlord. The landlord also argued that legislation would minimise the impact of any future lockdowns, so rather than not paying rent, the tenant should utilise any statutory benefits offered by the Government.

The judgment

The Court refused the tenant’s arguments for a COVID-clause, relying on the well-established case of O’May to claim it would not be fair and reasonable to:

1. Force the landlord to share risk in circumstances it had no control over, whilst Poundland had access to control in the form of financial relief or government schemes; or
2. reduce Poundland’s service charge responsibilities as service charge may relate to costs the landlord would still be liable for.

O’May held that the Court should not depart from the terms of the current lease unless:

1. The burden of changing the terms fell on the party proposing the change; and
2. the change proposed was fair and reasonable.

In this case, the Court did not believe that these conditions had been met. Clearly, the first limb was not met as the burden of adding a COVID-clause rested with the landlord whilst being proposed by the tenant, and the change was not seen to be fair and reasonable for the reasons above.

Poundland gives an interesting indication as to how courts may interpret O’May in a post-pandemic context. If it can indeed be taken as a future indicator, it is a welcome result for landlords as it recognises that landlords also have payment obligations during a pandemic. The difference between the cases, is that in the WH Smith case the parties had already agreed that the rent suspension clause would be triggered if the government-imposed restrictions on opening of premises (to prevent the spread of COVID-19) and what was in dispute was the extent of the restrictions that were required to trigger the clause. In the Poundland case the tenant’s argument was that such a clause should be incorporated as it was necessary in order to modernise the lease, an argument that was ultimately rejected.