The lasting effects of Covid-19 on property

On 18 July 2021, revocation regulations came into force as the final stage of the government’s four-step roadmap to navigate out of Covid-19. There were no further lockdown laws in England. Two years on, it is a good time to consider whether negotiations between landlords and tenants still show signs of “long Covid”; whether the government’s Covid arbitration scheme turned out to be “all that”; and the impact of the pandemic on rental evidence in rent and lease reviews. Pandemic clauses at lease renewal WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellschaft MBH [2021] PLSCS 68 in March 2021 was one of the first lease renewal decisions under the Landlord and Tenant Act 1954 post-lockdown. It caused quite a stir, not least because the parties had agreed on the inclusion of what came to be known as a “pandemic clause”. There is no standard form of “pandemic clause”. The one proposed in this case would permit a suspension of rent during a period of lockdown imposed in response to a pandemic or other health emergency. Although there was no ruling on the inclusion of a pandemic clause, the judge commented that: the market had already priced such clauses in to lease valuations; such clauses were justified on fairness principles; and it might have been necessary to make a downward adjustment in rent if the clause was not included. Within days, in Toplain v Poundland (unreported, Brentford County Court, 7 April 2021), District Judge Jenkins took a different approach, deciding that: there was no market precedent to impose such a clause;  and the purpose of the 1954 Act was not to give the courts discretion to (a) “insulate” the tenant against the trading risks or (b) rewrite commercial terms. Although tenants continue to seek pandemic clauses in leases, they are often not dealbreakers. Their presence or absence is not something we see being priced into lease valuations any more. Turnover rents are also increasingly being sought in lease negotiations. They have been on the rise for some time and the pandemic served to increase their popularity. In W (No 3) GP (Nominee A) Ltd and another v JD Sports Fashion plc (unreported, 22 October 2021) the court acknowledged that it had jurisdiction to determine a turnover rent (although chose not to allow them in that case). In National Car Parks Ltd v Hawksworth Securities plc (unreported, Cambridge County Court, 12 May 2016) the judge awarded turnover rent because (a) it was in the existing lease and (b) market evidence supported it. During the pandemic, landlords saw any rental arrangements as “temporary fixes” to avoid tenant insolvencies and allow business continuity. However turnover rents are here to stay. Landlords appear to be accommodating them provided they include turnover from click-and-collect orders or orders fulfilled from instore stock. The arbitration scheme In the aftermath of the pandemic, the government introduced the arbitration scheme to help parties deal with the £7bn plus commercial rent arrears that resulted. Despite the government anticipating more than 2,500 referrals, only a limited number of referrals were eventually made. In June 2021, the British Property Federation, in a study of 16,320 property leases, reported that 50% of rent owed from March 2020 had been paid and property owners and tenants had reached agreement in respect of a further 27%, through payment plans, waivers, rent holidays and deferrals. Of the awards published, landlords appear to have been more successful – a situation echoed in the courts, where attempts by tenants to defend actions based on Covid-related arguments have been unsuccessful. Some say it was too little too late, while others see it as a distraction established in the hope the problem would go away. One way in which the scheme may be seen as a success is that it prevented the County Court in central London from crippling under a mountain of insolvency, arrears and possession claims once the moratorium lifted. Rent reviews and lease renewals In Saville-Edells and another v Jain (unreported, 15 December 2021), a pre-pandemic application for lease renewal, the court had to consider (a) the rents pre-Covid; (b) the rents during Covid; and (c) the uncertainty of rents post-Covid. The court decided that interim rent should be a combination of both 2019 good and 2020 poor figures. The decision may assist landlords where there is a big discrepancy between rental evidence at the “relevant” date – in this case caused by the pandemic. It suggests that, in the interest of fairness, the court should not only look at the “poor” figures but also any improved “better” post “relevant” date figures as a reflection of what a recovering market looks like. More recently, in BMW (UK) Ltd v K Group Holdings Ltd (unreported, Central London County Court, 28 July 2023), the parties diverged significantly on rent. BMW argued that rent should be circa £76-£100 per sq ft and the landlord asserted that it should be circa £228. The court determined that BMW’s status as a “special purchaser” should not be considered when assessing rent under the 1954 Act, despite the fact that it could have done so given BMW occupied three other nearby units. The case highlights the court’s reluctance to favour either party disproportionally and desire to maintain a sense of fairness in a recovering and sensitive market. In summary Despite the initial stir created by WH Smith, pandemic clauses have not become the norm. Neither are we seeing an uptake in turnover rent clauses. Parties generally appear to be taking a sensible stance when agreeing lease terms and the rent, given the lack of directly comparable evidence at times and the courts seem keen to uphold the principles of fairness where possible. Will Densham is a partner and Kanchan Adik is a principal associate at Eversheds Sutherland Next time How is the real estate market responding to financial pressures in the economy and what lies in store in terms of legislative reforms and emerging trends?