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This article considers the decision in WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellschaft mbH, the first court judgment of a lease renewal considering the questions of pandemic clauses and the impact of COVID-19 on rent levels.
We have now had sight of the first published court judgment of a lease renewal considering the question of "pandemic clauses" and the impact of COVID on rent levels: WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellschaft mbH (25 March 2021).
It is instructive and a number of conclusions can be drawn from it. Of course, county court judgments are not binding and other judges can differ from their colleagues – but as this is the first case to have been widely published – it’s safe to assume it will be well read and considered by judges in the future. Here are the main talking points:
The parties were agreed that a rent suspension in the event of a forced closure due to a Pandemic would be included and the judge agreed that such clauses have “become something that all tenants want, and that the market has now priced it in".
It will likely be a challenge for a landlord to resist the inclusion of a pandemic clause – certainly in retail leases.
The tenant was open and able to trade throughout the pandemic as it was not forced to close because it contained a Post Office.
However, as the premises were contained in the "largely empty and echoing Westfield Centre" and suffered a 90% drop in trade – the judge rejected the idea that the tenant had obtained a windfall from being open – but rather had suffered by being forced to open in an otherwise barren trading environment.
Accordingly, the tenant got its way and the pandemic clause would be triggered if "non-essential retail" was ordered to close – notwithstanding that the premises itself remained open.
The location of the unit in a deserted shopping centre weighed heavily with the judge. Other contexts will differ and if it can be shown by a landlord that the tenant, being open for trade, will not suffer the same drop in footfall, a judge may feel free to reach a different conclusion.
The landlord's expert started from a position of £255 Zone A. The tenant's expert started at £142 Zone A.
Counsel for the landlord went so far as to suggest that the gulf between WH Smith's expert's valuation and the landlord's expert "went beyond a non-negligent margin of error". The Judge did not consider that fair, and noted that there were a number of issues affecting rental levels at the centre:
After assuming a starting point of £255 Zone A (the landlord's starting point), the judge addressed himself to deductions.
He ultimately discounted the rent by 54% to take account of the effect of COVID, quantum and location – leaving a final rent of £404,666 per annum. The Landlord had sought in excess of £700,000 and the Tenant under £170,000.
The impact of COVID was dealt with in two ways. On the one hand, there was a deduction of 20% to take account of risk. However, the judge had originally held when sending his draft judgment, that the presence of the pandemic clause should result in a 10% uplift in rent as a benefit. He resiled from this position in the final judgment. He came to the view that Pandemic clauses have “become something that all tenants want, and that the market has now priced it in.” He accepted that, “The risk for which the tenant has discounted his bid by 20%, namely the general decline in rentals caused by COVID, is not the same risk as that for which he has secured a pandemic clause (or at least it is far from a co-extensive risk), namely as an insurance policy against the extreme manifestation of the COVID effect represented by lockdown.“
Such large gulfs in expert opinion are likely to remain – particularly if experts will largely escape criticism due to the difficult circumstances of valuation. But the judge in this case clearly sought the solid ground of real evidence to base his valuation – before he considered the question of deductions.
Valuations will be grounded on the quality of the evidence available.
Now more than ever – proper comparables will matter.