What is a lease renewal?
Under the Landlord and Tenant Act 1954 (the “LTA 1954”), a tenant under a commercial lease is entitled to call on its landlord for the grant of a new “renewal” lease. This provides an opportunity for both parties to negotiate revised terms, but if the parties cannot agree the terms of the new lease the County Court has jurisdiction under the LTA 1954 to determine what the renewal terms should be.
Background to the dispute?
This case concerned the dispute between Toplain Limited (as Landlord) and Poundland Limited (as tenant) as to the terms of a renewal lease under the LTA 1954.
Poundland argued that it should be entitled to include in its renewal lease ‘pandemic clauses’ intended to protect the tenant against the kind of business interruption that was prevalent during the COVID-19 pandemic. These clauses included:
- Halving annual rent and service charge during future pandemic lockdowns (i.e. when government requirements cause store closures);
- A clause to provide relief for the tenant from complying with its insurance covenants during a lockdown; and
- Varying the forfeiture clause to prevent the Landlord from forfeiting the lease during a lockdown.
The Tenant sought to rely on a case involving WH Smith from earlier this year, to argue that it is fair and reasonable for lease terms to be updated on renewal to include ‘pandemic clauses’ to protect the tenant in the event of future pandemic lockdowns. However, the court clarified in Poundland v Toplain that the court in the WHSmith case had not been called upon to consider the principles established in O’May v City of London Real Property Co Ltd, as to whether it was fair and reasonable to include such terms on renewal. In the WHSmith case, the landlord and tenant had already agreed to include a clause under which the rent would be reduced in the event of a pandemic lockdown and the court had not been asked to determine whether as a matter of principle a tenant is entitled to call for such a clause to be included in the renewal lease. In the present case, the court was considering a dispute between the parties as to whether so-called ‘pandemic clauses’ should be included at all.
O’May v City of London Real Property Co Ltd is the leading authority on the question of what new terms should be included in a renewal lease under the LTA 1954 where the parties are in disagreement. The House of Lords had held in that case that the court should not generally use its discretion to change lease terms on renewal. It was up to the party seeking the change to demonstrate that the change is fair and reasonable.
The landlord argued in Poundland v Toplain that there is no existing market practice for such ‘pandemic clauses’ to be included routinely in new lease, and further argued that including these clauses would fundamentally change the relationship between the parties, not least by potentially reducing the rent payable by the tenant and preventing the landlord from exercising its proprietary right to forfeit.
In his judgment, District Judge Jenkins stated that "…it is not in my view sufficient a reason to impose a sharing of the risk [arising out of a pandemic lockdown] in circumstances over which the [landlord] would have no control whilst the [tenant] may have some by reference to reliefs or schemes that might be available to them by the government”. He added that “to impose this variation would in my judgement not be fair and reasonable and I do not do so".
Following O’May, Judge Jenkins decided that it would not be fair and reasonable to include new terms which would reduce the tenant’s liability during a period where it is difficult for the tenant to trade, because it is "not the purpose of the Act to protect or insulate the [tenant] other than to allow them to continue their business following the term end".
The future for pandemic clauses
This case is one of many examples of legal disputes to have arisen between commercial landlords and their tenants as a result of the business interruption caused by the Covid-19 Pandemic. Although the landlord successfully resisted the inclusion of new pandemic clauses in Poundland’s lease, the case may not be the last in which a tenant argues for the inclusion of terms (or implication of terms) into commercial leases intended to protect their financial position during the current and future pandemics.
Authored by Tim Reid and Pemi Arowojolu.