Key considerations for property rent suspension clauses during the pandemic: are they here to stay?
Many landlords have received requests from incoming tenants for pandemic rent suspension clauses over the last year. The question is, are they here to stay?
Whilst the current timescale for lifting restrictions means that most businesses will be fully trading again on or before 21 June, tenants are still requesting rent suspension clauses to provide protection in the event of further lockdowns or restrictions. This is the case even for premises which are subject to agreements for lease and, in some circumstances, will not be ready for occupation for several years.
Usually, rent suspension clauses are only included on the basis of damage by an insured or uninsured risk and this requires physical damage to the relevant property or the estate which prevents use and occupation of the property or access to it. A pandemic rent suspension clause goes further than this in that the rent is suspended if tenants are unable to operate or fully operate from their premises due to Government imposed restrictions.
Key points for landlords to consider in relation to rent suspension clauses:
- Will all rents be suspended?
Whilst a landlord may agree to suspending the annual rent payments if the tenant is unable to trade from the premises, they may be more reluctant to extend this to service charge and insurance payments, particularly as the landlord is likely to still have to provide the services even if the tenant is unable to trade. Consideration should also be given as to whether the rent will be suspended in full or, for example, whether a 50% rent suspension can be agreed. These points are a matter of commercial negotiation between the parties.
- What will trigger the suspension?
At the beginning of the pandemic, most tenants limited their request for a rent suspension clause to cover the tenant being unable to trade due to Government imposed restrictions during the Coronavirus pandemic. However, some tenants are now looking to ensure that the drafting is more wide reaching and covers any epidemic or pandemic, not just those relating to Coronavirus.
In addition, a recent case in the Winchester County Court, WH Smith Retail Holdings Limited v Commerz Real Investmentgesellschaft mbH on which judgment was given on 25 March 2021, offers an insight into a Court’s view on the nature of the trigger of the rent suspension.
This case involved a renewal of a lease under the Landlord and Tenant Act 1954 during the pandemic. It appears that the landlord and tenant had agreed that the renewal lease should include a pandemic rent suspension clause but the trigger for such suspension had not been agreed between the parties.
In summary, the tenant’s position was that the rent should be suspended during a period in which a non-essential retailer would not be able to open their premises but the landlord’s position was that a rent suspension should only apply if the tenant was compulsorily required to cease trading from the premises. Given that WH Smith’s subject premises was located in the Westfield Shopping Centre, even though WH Smith were not required by restrictions to close, its footfall was materially affected by the closure of other premises within the centre and local area.
The Court sided with the tenant’s proposal in that the relevant trigger was the closure of non-essential retailers. It is therefore clear from this case that the scope of such a rent suspension clause can be wider than a specific tenant being unable to trade. On that basis, the nature of the trigger should be given considerable thought.
- On how many occasions can the rent suspension clause be used?
Landlords will be keen to ensure that the number of occasions on which the rent suspension clause can be invoked is limited to as few occasions as possible and ideally to a period of 3 or 6 months at a time. On the contrary, tenants will want to ensure that they are protected in the event of any further restrictions being imposed in the future and would prefer that the clause is not limited.
- Will the rent suspension be personal?
A landlord’s preference would be for a pandemic rent suspension clause to be personal to the initial tenant, so that in the event of an assignment, the assignee does not benefit. On the other hand, a tenant would want the clause to apply to its successors.
What does this mean for rent suspension clauses moving forward?
It appears that pandemic rent suspension clauses may well be the new normal although this will not be welcomed by landlords. From a tenant’s perspective, it is clear that pandemic rent suspension clauses are not limited to a full closure of the tenant’s business and can be much wider in scope.
Given that there are a number of points to be taken into account, it is important that the detail is agreed between the parties at an early stage in the negotiations.
Do you need more information on pandemic rent suspension clauses?
If you would like to discuss any of the topics in this article, please get in touch with our real estate team who would be happy to talk through your options.
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