7. Oktober 2021

RED alert - Autumn 2021 – 2 von 7 Insights

"COVID clauses": Risky business is not the Court's business

  • Briefing

Poundland Limited v Toplain Limited [2021] (unreported)

Summary

When seeking a renewal of its tenancy, a business sought to include a new term in the lease that would substantially reduce the rent in the event of a lockdown caused by the COVID-19 pandemic. Having reviewed the applicable law, the County Court refused to include the term, holding that it would not be fair and reasonable to do so. Under the terms of the existing lease, the parties had already apportioned the relevant risks and it was not the Court's duty to protect the tenant from these, particularly in circumstances where the Government had offered various reliefs and benefits to impacted tenants.

The facts

The case concerned the statutory renewal of a lease of commercial premises on King Street in Twickenham, pursuant to Part II of the Landlord and Tenant Act 1954 (the 1954 Act). The landlord did not oppose the tenant's claim for a new lease and the parties were able to agree most of the principal terms for the letting, including the term of the lease and the annual rent. However, various other terms remained in dispute, most notably the tenant's request to include a so-called "COVID clause" in the new lease. Under the terms of the tenant's proposed clause, the annual rent would be reduced by 50% during any period of defined lockdown. The landlord resisted this.

The law

When dealing with statutory lease renewals under the 1954 Act, specific rules apply to determine the rent and the term length of the new lease. The remaining terms of the lease will normally replicate those in the existing lease, save where any reasonable modernisation is required.  After all, the purpose of the 1954 Act is to renew tenancies, not to start again from scratch.  However, terms may be altered where certain tests are met, as laid down in the leading case of O'May v City of London Property Co. In summary, these tests are as follows:

  • Is the change fair and reasonable?
  • Can the party objecting to the change be adequately compensated (usually by an adjustment to the rent)?
  • Will the change jeopardise the tenant's security and its ability to conduct its business?
  • Has the Court taken account of the weak negotiating position of a sitting tenant?

The arguments

In this case, the onus was on the tenant to justify the inclusion of the COVID clause, since it was the party seeking the change. It put forward the following arguments:

  • Including the clause could be considered "modernisation" as it was a natural consequence of the global pandemic.
  • If the tenant's business was unable to trade, the landlord would inevitably suffer rent arrears as the tenant would be unable to pay, so it would be in both parties' interests to agree a sustainable deal.
  • There was evidence that many landlords and tenants had voluntarily agreed such clauses in the open market since the pandemic began.

In response, the landlord argued that:

  • COVID clauses were not being granted in the market regularly.
  • COVID clauses fundamentally change the relationship between the parties.
  • The terms of any lockdown would be controlled by Government, with tenants able to take advantage of various reliefs on offer.

The decision

The Court sided with the landlord. It held that the inclusion of a COVID clause would impose a significant new risk upon the landlord. Under the tenant's proposed wording, the landlord would share the tenant's risk of paying rent during periods where it was difficult for the tenant to trade. This was a significant departure from the terms of the existing lease, and it would not be "fair and reasonable" to impose.

The Judge added that the purpose of the 1954 Act is not to "protect or insulate" tenants from commercial risks, but to enable them to continue trading from their existing premises when their leases end. In this case, the balance of the risk had been negotiated previously and this could not be redesigned by the Court. The Court also noted that the tenant would likely benefit from reliefs offered by the Government.

Our comments

Tenant requests for "COVID clauses" or "pandemic clauses" are becoming more common, particularly in the retail and leisure sectors. There is no industry accepted standard for such clauses and many institutional landlords will refuse such requests as they require consistent income for their investors. Following this decision, tenants in this situation may now seek to reduce their exposure through appropriate forms of business interruption insurance. However, since this is merely a decision of the County Court, it is still possible that tenants will attempt to litigate this point in the hope of a more favourable outcome.

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