Reed Smith Client Alerts

It is a rare occasion that an unopposed lease renewal under the Landlord and Tenant Act 1954 reaches trial. This may become a more regular occurrence, however, as landlords and tenants find it more difficult than usual to agree terms for new leases against a backdrop of uncertainty in the current climate, which is significantly affecting the market for lettings. WH Smith Retail Holdings Limited v Commerz Real Investmentgesellschaft MBH [2021] showcased this recently, and provided us with an insight into the court’s thought process when determining the terms for a new lease.

Authors: Brad Trerise

The case concerned the lease of a retail unit in Westfield Shopping Centre, Shepherd’s Bush, London, which had expired following the service of a request for a new lease by the tenant, WH Smith Retail Holdings Limited.

One of the key disputed terms in the new lease was what a pandemic rent suspension clause should say. Both parties had agreed to include such a clause, in principle, but had disagreed on its content. Had the parties not agreed to include this clause, as it was not in the existing lease, there would have been an assessment of the fairness and reasonableness of such a clause, pursuant to O’May v City of London Real Property Co Ltd [1983]. Interestingly, the court did comment that the clause would have been fair in any event. Crucially, WH Smith is a post office and an essential retailer, so remained open for trading at all times during lockdown. WH Smith successfully argued that the closure of other non-essential retailers in the shopping centre should trigger a 50 per cent rent suspension clause (because of the reduced footfall). The court disagreed with the landlord, who said a rent suspension should only be triggered if they were forced to close themselves.

Important practical issues are likely to arise as a result of the judgment in WH Smith v Commerz:

  1. Many tenants will now expect to have some kind of pandemic rent suspension clause in new leases, particularly in view of the court’s comments that they are deemed to be fair.
  2. Where tenants are not forced to close but may become unprofitable when other non-essential retailers close, the rent suspension trigger would be the closure of the surrounding non-essential retailers.
  3. The benefit of having a rent suspension clause does not merit an uplift in rent.
  4. Tenants may argue that without a pandemic rent suspension clause their rent should be discounted.

One other useful point came out of the judgment. It is correct to discount the headline rent for a normal fitting-out rent-free period when assessing comparable evidence to determine the open market rent for a new lease under the Landlord and Tenant Act 1954.

Client Alert 2021-124