This week we report on recent cases concerning the effect of Covid-19 on a 1954 Act lease renewal and the exercise of a break option in a long lease. We also include details of the Government's Commercial Rents and Covid-19 Call for Evidence.
1954 Act commercial lease renewals in the pandemic
Unopposed lease renewals are rarely litigated to trial. The recent case in Westfield Shopping Centre of WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH is one of the exceptions, in which the Court determined two key issues of potentially wide impact in the context of the Covid-19 pandemic:
- The parties were agreed that there should be some form of Covid rent suspension clause, and had by the time of the trial agreed that it should see the parties sharing the risk on the rent equally (i.e. the rent would be reduced by 50%) but with service charge remaining payable in full. As the parties had agreed there should be a suspension clause (albeit they could not agree the precise trigger for it), the Court was not asked to determine this but interestingly the Judge did comment that he considered that "essential fairness demands it".
- Whilst interim rent is normally the same as the new rent, where the market has shifted substantially from the position it was in at the earliest point the Court would have had jurisdiction to determine the renewal, the Court should set the interim rent at that different figure. In this case that earlier date was in 2018, before the pandemic and at an earlier point in the perceived ongoing downward shift in retail values. Accordingly, if the new tenancy had commenced at that earlier date the rent would have been much higher than the actual rent ordered. On this basis, the interim rent was fixed at the higher sum of £758,785 p.a and the rent under the new tenancy at £404,666 p.a.
Break option successfully exercised for developer's failure to complete on time
In Wigan Borough Council v Scullindale Global Ltd [2021] EWHC 779 (Ch) the High Court has determined that a break option under a long lease had been validly exercised where the developer failed to complete its development on time.
Wigan Council granted a long lease of Haigh Hall country home and gardens to a developer, Scullindale, to convert the Hall into a hotel. The lease contained a break option whereby if stated milestones were not met (which included completing the development prior to 23 May 2018), the Council could terminate the lease at any time by serving a break notice. 16 months after the milestone, the Council issued a break notice on 19 September 2019 to terminate the lease 2 months later.
The Judge ruled that:
- A term could be implied into the lease that a valid break notice could only be served "at any time whilst an Event of Default persists" to give business efficacy to the lease and avoid an open-ended break option.
- As Scullindale failed to complete the development by 23 May 2018 and still had not completed by the time Wigan Council served the notice, and Scullindale failed to persuade the Judge that the reasons for the delay were due to the Council, the break notice was held to be effective in terminating the lease.
- Having validly exercised the break option, pursuant to the lease terms the Council was liable to pay Scullindale compensation for the open market value of Haigh Hall.
The Council's claim for mesne profits and damages for trespass was dismissed, on the basis that the Covid-19 pandemic meant that the Council could not have re-let the property as a hotel venue and therefore had suffered no financial loss.
For followers of Wigan Warriors, the Judge's final score was 20-6 to the Council. For followers of the Latics (Wigan Athletic FC) the score was 4-1. For the neutrals, the case offers support for the view that a break clause contained in a long lease that is triggered by default of the tenant can be exercised on its terms, without the tenant being entitled to apply for relief from forfeiture.
Government's Commercial Rents and Covid-19 Call for Evidence
The Government has announced a call for evidence to support the Government's decision-making on the best way to withdraw or replace the measures on commercial lease evictions, namely the moratorium on commercial lease evictions and restrictions on the use of the Commercial Rent Arrears Recovery (CRAR).
The Government is looking to gather evidence and gain a better understanding of how landlords and tenants are responding to the build up of rent arrears resulting from businesses being unable to trade normally during the coronavirus pandemic. The Government is hoping that the responses to this consultation will create a clearer picture of the risk to economic recovery posed by the rent arrears that still remain and clarify how landlords and tenants are amending existing lease terms to prepare for the recovery period that will follow the lifting of trading restrictions. The evidence obtained in this consultation will inform government policy in relation to the withdrawal from the above measures.
Commercial landlords and tenants, lenders and investors and anyone with an interest in or connection to the commercial property market in England are all being encouraged to submit their views by 11:45pm on 4 May 2021 by completing an online survey.
Insights from around the firm
- Webinar: ESG and social value in offices
- The Future Homes Standard: Part L Building Regulations
- Webinar: Building safety – It's all about the people: In-occupation phase
- Report: London – Positioning cities for inclusive growth
- Report: Exeter – Positioning cities for inclusive growth
- Report: Manchester – Positioning cities for inclusive growth
- Report: Birmingham – Positioning cities for inclusive growth
Positive news stories
While Covid-19 continues to dominate news headlines across the globe, there have still been some uplifting stories:
- On 12 April 2021, the UK recorded its greenest day ever. View the full story here.
- Good news for the swimmers amongst us – the Outdoor Swimming Society has launched a Swim Couch to 5K initiative. View the full story here.
- Wildlife charities have raised almost £8m to boost nature schemes across England and Wales. View the full story here.
