The recent case of WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH is an unopposed lease renewal case under the Landlord and Tenant Act 1954 (the Act).
As a relatively rare example of an unopposed lease renewal case that proceeded to trial, this case provides insight into the Court's approach to determining terms of a new lease where there is no agreement between the parties. The terms of particular interest in this case were the trigger pandemic rent suspension clause, the rent payable under the new lease, and the interim rent payable.
The case concerns the renewal of a lease for a retail unit in a shopping centre in the context of the COVID-19 pandemic.
The tenant, WH Smith Retail Holdings Limited, occupied a unit in the Westfield Shopping Centre (Westfield) in London under a 10-year lease with a contractual expiry date of 1 October 2018. The lease continued after this date by virtue of the Act, with a passing rent of £953,000 per annum.
The tenant served on the landlord, Commerz Real Investmentgesellshaft MBH, a Section 26 Request for a new lease on 23 March 2018.
The parties having failed to agree terms for the renewal lease, the case was heard by the Court in November 2020. The Court's findings as to the terms of the renewal lease make interesting reading.
Lease terms other than rent: COVID-19 rent suspension clause trigger
The Court must first determine the other non-rent lease terms in dispute before moving onto the question of rent. This is because the other terms of the lease are likely to affect the amount of rent payable.
Accordingly, the Court first dealt with the other terms in dispute, which included the trigger for the pandemic rent suspension clause.
The starting point for the Court is to consider the terms of the current lease. If a party wishes to depart from a term in the current lease, then that party has the burden of persuading the court to make the change against the will of the other party (referred to in this case by the Court as an "O'May burden", by reference to the well-known case of O'May). In addition, the change must be fair and reasonable in all the circumstances.
At the outset of trial, the landlord and tenant agreed what would happen in the event that the rent suspension clause was triggered. What remained in dispute was what the trigger event would be.
The tenant argued that the trigger should be the closure of non-essential retailers. During 2020, the tenant was not required to close its store and in fact kept the store open because a Post Office, which provided essential services, was located within it. However, most of the units within Westfield were shut. This meant that the number of shoppers visiting the tenant's store was significantly reduced, leading to a substantial reduction in sales.
The landlord's position was that tenant had an advantage over non-essential retailers because it was able to continue trading. On that basis, the landlord argued that either:
- the trigger for the rent suspension clause should be upon expiry of a period of four weeks after the closure of non-essential retailers, or
- the amount of the reduction in rent triggered by such closure should be reduced.
The tenant successfully persuaded the Court that because both parties were seeking to change the lease, the tenant did not have the usual "O'May burden". The Court reasoned that this was correct because the term was not being imposed on the landlord against its will. But even if that were wrong, the Court concluded that fairness required it.
The Court found in the tenant's favour, dismissing the landlord's contention that the tenant obtained a competitive advantage because it was able to remain open. The Court concluded there was no advantage to the tenant of remaining open because being located in Westfield, it relied on the surrounding stores for footfall and these stores were largely shut. Accordingly there would be a rent suspension clause that would take effect upon closure of non-essential retailers, providing for a 50% reduction in rent.
The Court did note that the situation might be different on the high street.
The Act provides that the Court must determine the rent payable under the new lease to be that which the premises might reasonably be expected to be let in the open market by a willing landlord, taking into account the other terms of the lease (other than those relating to rent) and disregarding certain matters including any effect on rent of the fact that the tenant has been in occupation of the premises.
As such the basis of the valuation is a hypothetical transaction: empty premises, willing landlord and willing tenant.
Willing tenant in a saturated market?
An interesting question which the Court dealt with in this case was whether it was still appropriate to assume a willing tenant in a market where there was an excess of supply. Part of the tenant's argument was that there was little to no demand for retail premises of a comparable size to the tenant's store within Westfield, as evidenced by a number of such units being empty or let on short-term leases.
The Court considered a recent Supreme Court rating case in which it was held that even in a saturated market, the correct approach to such a hypothetical transaction is to assume a willing tenant prepared to agree a rent and that, "in the absence of other material evidence", the valuation is to be based on evidence of general demand for similar properties within the local market.
The Court in this case highlighted the Supreme Court's wording "in absence of other material evidence" to conclude that in assessing the general demand, the Court should take into account material evidence of, for example, a fall in demand in the market since the date of the valuation evidence.
After dealing with this issue, and the issue of the potential effect of a rent-free period for fit-out on determining the new rent, the Court then delved into the exercise of assessing the comparables which made up the valuation evidence. After considering a number of factors including the wider retail sector, the Westfield Centre and the location of the tenant's store within it, the effect of the inclusion of a pandemic clause in the new lease, and a discount for COVID-19, the Court concluded that the new rent should be £440,666 per annum. There was no rent uplift in return for the inclusion of a pandemic-protection clause, as the Court found that such clauses were now common in the market thus not justifying any special rental treatment.
This section of the judgment is an interesting and instructive illustration of how the Court will analyse comparable evidence adduced by each party's valuation experts, and is valuable reading to any party involved with preparing evidence in 1954 Act renewals.
Where a new lease of a premises is granted, and the renewal is not opposed, the general rule under the Act is that the interim rent will be the same as the new rent under the new lease. In this case, the Court determined the rent under the new lease to be £404,666 per annum.
However, an exception to the general rule is where a party convinces the Court that there has been a change in the market between the date from which interim rent is payable and the start of the new lease which would lead to a substantial differential in rent over the period. Where the exception applies, the interim rent is the rent that the Court would have determined had the new lease started on the date that the interim rent became payable.
In this case, the parties agreed that interim rent became payable from 1 October 2018. It was also agreed that the retail market was in a much better state in October 2018. Had the Court determined the rent payable under the new lease commencing on 1 October 2018, it would have differed substantially from the new rent. In the end, the Court concluded that interim rent should be £758,785 per annum.
This case is significant as it is the first example of how the Court will treat attempts by tenants to include some form of pandemic-protection clause in a lease renewal, and what, if any, effect on rent the inclusion of such a clause would have (none, in fact). However, as both landlord and tenant in this case agreed that such a clause was appropriate in the circumstances (and it was only the precise trigger event that remained in dispute), it remains to be seen how a court might decide a different case where the landlord was strongly opposing the insertion of any form of pandemic-protection clause at all.