Pandemic Clauses in Commercial Leases – an Update
Prior to 2020, few businesses could have imagined a situation where entire high streets would be forced to close down. However, having experienced a number of national lockdowns that resulted in many businesses being forced to close and therefore unable to bring in their usual level of revenue, many have looked to ways that they may be able to protect themselves in the future.
During the course of the pandemic, many businesses were able to agree a deal with their landlord for a reduced level of rent, or deferred payments. However, in the vast majority of cases, this would have been down to the discretion of the landlord, with any contractual agreement pertaining to a pandemic being unlikely.
One way for businesses that occupy commercial premises to afford a greater level of protection is to negotiate the inclusion of a pandemic clause in new leases or at lease renewal.
A pandemic clause can be used to outline what should happen if a government-mandated closure or other pandemic event forces a business to stop trading, dealing with specific matters such as how rent should be paid and at what level, and how other obligations should be fulfilled by both parties during the period of closure.
A recent case in the court has shed some light on the use of pandemic clauses in commercial leases. In Poundland Limited v Toplain Limited, the tenant (Poundland) had set out a number provisions to be included under a pandemic clause in the lease renewal – namely that the landlord would be prevented from forfeiting the lease during a lockdown period and a proposal to reduce the rent by half. The county court ruled that the inclusion of such as clause would be unfair and unreasonable, shifting risk too far in the direction of the landlord. The court also commented that the tenant could take advantage of government relief schemes.
This case is interesting as its outcome differs somewhat from an earlier case WH Smith v Commerz Real. Here, the parties had already agreed to the inclusion of a rent reduction clause based on a pandemic event within the lease but not on the circumstances that would trigger it. In making this ruling, the court concluded that a pandemic clause may be used if such clauses were common in the market at the time.
In conclusion, should pandemic clauses in commercial leases become commonplace, they may be upheld by the court, should it get to that. However, they would need to be fair and reasonable, not placing any undue level of risk on either party. In the majority of cases, lease renewals are negotiated between landlords and tenants without the intervention of the courts. Having an indication on what is and what isn’t likely to be permissible provides some clarity for both landlords and tenants on how pandemic clauses may be used going forward.
Katrina Fox is an Associate Solicitor in the Commercial Property Department at O’Donnell Solicitors.
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