Can Pandemic Clauses be Inserted into Commercial Lease Renewals?
By Jonathan Lilley, executive chairman at Blaser Mills Law
The Government’s introduction and extension of COVID-19 restrictions has had a marked effect on commercial property arrangements, with an increase in tenants seeking to include pandemic clauses when negotiating their lease renewals.
While measures have been introduced to support commercial tenants in these unprecedented times, the topic of pandemic clauses has become more important than ever, and it is essential that landlords understand the implications of these clauses when negotiating a commercial lease renewal.
What are pandemic clauses?
COVID-19 related clauses, also known as pandemic clauses, are provisions in a lease that are triggered by certain types of catastrophic events. These provisions may cover several lease requirements, such as ‘Keep Open’ clauses or service charge provisions, but the primary issue is usually the payment of rent.
Rent reduction or suspension provisions apply when a commercial property becomes unusable due to restricting situations such as the closure of the premises due to Government regulations. Pandemic clauses allow rental payments during these restrictive measures to be reduced, delayed, or suspended when certain requirements are met.
Inserting new clauses into lease renewals
The Landlord And Tenant Act 1954 governs the process for renewing commercial business leases which have not excluded the relevant provisions of the Act. A tenant is entitled to renew the business lease when it reaches the end of its term, which will involve negotiating the new terms of the lease.
Lease renewals, while negotiated on broadly similar terms as the current lease, are subject to reasonable modernisation. Tenants may argue that requesting a pandemic clause to minimise their risk is simply a form of reasonable modernisation.
In cases where a commercial tenant is renewing a lease under the Act, and the current lease does not include a pandemic clause, the tenant may request that the Court add this new term into the lease. However, the onus will be on the tenant to demonstrate why this new term is appropriate or necessary, and why it is both fair and reasonable.
Poundland Limited v Toplain Limited
While renewing its lease under the Act, Poundland proposed new lease terms intended to reduce the risk of potential future pandemic restrictions. One of the new terms it sought to include would reduce the annual rent and service charge by 50% in the event of “use prevention measures” that meant the business was unable to continue trading.
The landlord rejected these new terms based on there being no market precedent for such a change and stated it would significantly alter the nature of the commercial relationship between landlord and tenant.
The Court ruled in favour of the landlord, with the judge citing that the proposed changes to the lease would impose an unfair risk on the landlord that should instead be borne by the tenant. Additionally, the landlord could not be expected to share such a risk in a situation they had no control over, and where the tenant could benefit from Government relief schemes.
The proposed new clause would trigger a major shift in the relative commercial positions of the parties to the lease. This, combined with the fact the Government had already made rent provisions for tenants in the emergency Coronavirus Act 2020, meant Poundland had failed to demonstrate that the new clause was appropriate or justified.
How pandemic clauses could operate in practice
Courts will inevitably take a common-sense approach that relies on established principles in lease renewal cases, considering whether the proposed changes to the lease terms are supported by good reason and are fair between both parties.
However, in commercial property markets where landlords are struggling to find or retain tenants, it may be possible for tenants to negotiate the inclusion of pandemic clauses into their lease renewals.
There has similarly been an increase in Company Voluntary Arrangements [CVAs] that reduce lease and rent liabilities for tenants in the event of further pandemic restrictions.
If landlords do consider coming to a private arrangement with tenants to preserve commercial relationships, it is vital these arrangements are fully understood by both parties and are properly documented.
The pandemic has had a profound effect on how lease renewals are negotiated, with an increase in tenants who want to protect their own commercial interests in the event of further Government imposed restrictions.
Both real-world evidence and property market trends are likely to be key in determining whether the insertion of pandemic clauses into the terms of an existing commercial lease are fair and justified for both landlords and tenants.
Given that negotiations for commercial lease renewals often involve particularly complex areas of property law, it is crucial to obtain accurate legal advice at the earliest opportunity from a commercial property lawyer who can advise you on the best course of action in the event of a dispute.