As the UK emerges from lockdown, the property sector is beginning to address some of the questions arising from the upheaval of the past year. The Westfield Shopping Centre in Shepherds Bush is playing a key role in this process, being at the centre of some significant cases relating to the pandemic. We have outlined below a few areas of particular interest for commercial landlords and tenants.
Pandemic clauses and the impact of Covid-19 on rent
The case of WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellschaft mbH is the first recorded judgment on the impact of the pandemic on unopposed lease renewals and a rare example of an unopposed lease renewal case that proceeded to trial. The case relates to the renewal of a lease in the Westfield Shopping Centre in Shepherds Bush protected under Part II of the Landlord and Tenant Act 1954 and offers helpful guidance on the inclusion of pandemic rent suspension clauses in leases and rental values.
In this case, both parties agreed that the renewal lease should contain a pandemic rent suspension clause however, a disagreement arose concerning the trigger for the rent suspension. WH Smith Retail Holdings (the Tenant) argued that the pandemic rent suspension clause should be triggered on the closure of non-essential businesses even though this particular branch included a post office which enabled it to remain open as an essential business. Commerz Real Investmentgesellschaft mbH (the Landlord) however argued that the rent suspension should only be triggered in the event of the tenant itself being required to close.
The Court agreed with WH Smith (the Tenant) and held that despite being able to remain open, evidence showed that the closure of all other shops had a significant impact on footfall in the shopping centre with a corresponding effect on the Tenant’s business. This paves the way for leases to address not only forced closures of non-essential businesses but also the knock-on effect on those essential businesses that are able to remain open.
The parties also disagreed on the rent payable. The Landlord submitted that the rent should be £751,999 per year whilst the Tenant claimed that the rent should be £146,300 per year. The court must determine the terms of the new tenancy before moving on to determine the rent payable, because those terms are likely to have an impact on the market rent.
When considering the level of rent payable, the Court evaluated demand within the centre, the impact of the pandemic on retail more generally and the location of the Tenant’s premises. It concluded that a rent of £404,666 per year was payable.
It is worth noting that in determining the rent the Court did not consider that there should be any increase in the rent payable as a result of the inclusion in the lease of the pandemic rent suspension clause. The Court commented that it is now market practice to include such clauses within leases and these have been priced in by the market, although we need to keep in mind that this was a decision specific to retail premises. Landlords should be aware of, and take advice on, the potential impact on rents if a pandemic rent suspension clause is refused.
It remains to be seen how the court will approach similar issues where footfall may not be an issue for examples premises located on the high street.
Recovery of rent arrears
The measures brought in by the government to protect commercial tenants during the pandemic placed restrictions on recovery of unpaid rent by landlords.
Two recent cases have considered the effect of the pandemic on a tenant’s obligation to pay rent under a lease in claims brought by landlords for unpaid sums. In each case, the Court found in the landlord’s favour.
A link to our case analysis on the first case of Commerz Real Investmentgesellschaft mbH v TFS Stores Limited can be found here.
The second case, Bank of New York Mellon (International) Limited v Cine-UK Limited, Mecca Bingo Limited & Sportsdirect.com Retail Limited, also considered arguments around frustration and “temporary frustration”.
Frustration of a contract occurs when an unforeseen event outside the control of the parties takes place after the contract is entered into and the effect is to make the contract impossible to perform or alters performance so greatly that it would be unfair to hold the parties to their obligations.
The Court did not consider that the lease was frustrated in this instance. It looked to the terms of the lease, including the length of term left to run as compared to the length of the disruption. The Court considered that though the pandemic could be capable of constituting an event giving rise to frustration, the circumstances had not become so radically different than what was contemplated when the parties entered into the lease that it would be unfair for the lease to continue.
The Court found that the lease had dealt with supervening events by allocating the risk of disruption within the rent suspension clauses.
A link to the judgment can be found here.
Updates to Permitted Development Rights
The High Street has been particularly badly hit by the pandemic. Use Class E, relating to the commercial, business and service category, was introduced on 1 September 2020 which made it easier for high street premises to change use without the requirement for planning permission. The intention behind the creation of the new class was to enable a wider range of the commercial uses common to high streets and to adapt to changing circumstances and the needs of their communities.
Following a period of consultation that ended in January 2021, the Town and Country Planning (General Permitted Development etc.) (England) (Amendment) Order 2021 (the Order) came into force on 21 April 2021 and created a new class of permitted development (Class MA) to authorise changes from Use Class E commercial uses to Use Class C3 residential uses. This change simplifies the process for converting empty premises, such as shops and offices, to residential use.
The changes implemented by the Order will take effect from 1 August 2021 and will allow for a change from Use Class E to Use Class C3 where the property has been in Class E use for two years (this includes time spent in use classes now contained within Class E) and has been vacant continuously for a minimum of three months.
Class MA will apply to conservation areas but not National Parks or Areas of Outstanding Natural Beauty. Prior approval of the local planning authority is required to exercise the right and the area that can be converted is capped at 1,500 square metres. Anyone wishing to use Class MA will attract a fee of £100 per dwelling house.
Another change taking effect on 1 August 2021 is an upper limit of 1,500 square metres on all conversions from office to residential uses. An applicant will need to have its prior approval application submitted by the 31 July 2021 to satisfy the transitional provisions in respect of this change and any conversion will need to be undertaken within three years of the application date or the permitted development right will be lost. Therefore, those intending to convert a large office space into residential units should act quickly to ensure that an application is made before the deadline.
Any existing Article 4 directions made by local authorities withdrawing permitted development rights from office to residential will continue to apply. Therefore, searches will need to be carried out to determine to what extent the new permitted development rights can be exercised. However, some local authorities have already acknowledged a change in the office needs of their local business and have indicated their intention to review these existing Article 4 directions to allow changes from office to residential use.
Government call for evidence on commercial rents and Covid-19
The government launched a “call for evidence” in relation to the government’s plans to withdraw or replace the measures introduced to protect commercial tenancies during the pandemic, namely, the moratorium on commercial lease evictions and restrictions on the use of Commercial Rent Arrears Recovery.
The aim of this consultation is to understand how landlords and tenants are dealing with the accrual of rent arrears following the disruption to trading so that the government can decide on the most effective way forward, whilst preserving businesses and the jobs that they provide.
The government is seeking views in this regard from businesses, business representative organisations, commercial landlords, lenders, and investors, commercial property professionals and anyone with an interest in, or connection with, the commercial property market in England. The views of SMEs are sought in particular. Anyone keen to have their say should do so before the deadline for responses at 11.45pm on 4 May 2021. A link to the online survey can be found here.