Are pandemic clauses in commercial leases considered fair?
Since the start of the Covid pandemic, many commercial leases are now being drafted with anticipation of another lockdown or future pandemic. Landlords and tenants alike are keen to protect themselves from situations in which they could see the forced closure of their business. The inclusion of a pandemic clause may deal with some lockdown scenarios we have experienced over the last year, but the courts have recently ruled that they may not be appropriate for every commercial lease.
What is a pandemic clause?
A pandemic clause will deal with what should happen if a government-mandated closure or other pandemic event forces a business to stop trading. It can deal with how rent is paid and how much, as well as how certain other obligations should be fulfilled. These clauses may become commonplace, and market evidence will likely show in the future whether they are to be expected in a lease.
The circumstances of the case
In the case of Poundland Limited v Toplain Limited, the County Court considered whether a pandemic clause should be included in a renewal lease.
The circumstances, in this case, were such that the tenant had protections under the Landlord and Tenant Act 1954 (“the Act”). If a tenancy has the protections afforded by the Act, then the tenancy does not terminate automatically at the end of the contractual term. The tenancy will continue under the Act on the same terms unless it is terminated in accordance with the procedure in the Act. Either the landlord or tenant can initiate a renewal of the lease setting out the proposed terms of a new lease.
Poundland was the tenant in the case, and when renewing their lease, they wanted to add provisions such as a pandemic clause. This would reduce their liabilities in the case of a future pandemic event. They included provisions that would prevent a landlord from forfeiting the lease during a lockdown period and a proposal to reduce the rent by half in case of a pandemic event.
The landlord stated that the market precedent did not support the proposed pandemic clauses. The inclusion of these would unfairly shift the risk to the landlord.
The county court’s decision
The court found that whether a pandemic clause should be included was whether it would be a fair and reasonable variation to the terms of the existing lease. The variation must be fair and reasonable having regard to the terms of the current lease and all the relevant circumstances, which could include the market precedents. The burden of proof of this lies with the party seeking the variation – in this case, with Poundland.
The variations were rejected. The court held that the risk should not fall on the landlord and was reluctant to shift the allocation of risk. Matters such as the tenant’s cash flow were a tenant’s risk as a business, and the landlord should not bear this risk. The court also considered that the tenant could take advantage of government relief schemes. Poundland was not able to justify the inclusion of the pandemic clause.
This is a different position to the recent WH Smith v Commerz Real case, in which the parties had agreed on the inclusion of a pandemic clause already but were undecided on what exactly would trigger it. In those circumstances, the court considered that a pandemic clause could be included if there were evidence that such clauses were common in the market at the time.
What does this mean for a landlord?
It is interesting that many tenants now expect some form of protection against pandemic related events to the extent that resisting a pandemic clause could adversely affect the rental yield of a property. Nonetheless, this is a reassuring result for landlords and shows that the court will not allocate risk to a landlord without justification. It is important to note that these cases have been decided in the County Court, which means that they will not be binding on future cases, but are indicative of what the courts approach may be. If such provisions are going to become more commonplace in the future, we can expect leases that do not have such provisions to command a lower rental yield.
Here to help
If you have any more questions or would like further information regarding pandemic clauses, you can contact our Property Litigation Team on 0161 941 4000 or email The Real Estate Litigation Team.