Poundland fails to secure the inclusion of a ‘pandemic clause’ in new lease

The case of Poundland v Toplain Ltd, heard at Brentford County Court, dealt with whether or not a pandemic clause could be included in a new lease.

Background

The Claimant tenant (Poundland Ltd) occupied commercial premises in King Street, Twickenham. Their current lease had expired and, pursuant to the Landlord and Tenant Act 1954 (the Act), Poundland served a section 26 notice on its Landlord (Toplain Ltd) requesting a new lease. The parties agreed that Poundland should be given a new lease but they were unable to reach agreement on certain terms in the new lease. In these circumstances, either party can apply to the court to determine what the renewal terms should be.

Amongst other terms, the Claimant requested that during a lockdown: the annual rent and service charge would be halved; they would be relieved from complying with the insurer’s requirements; and that the landlord could not forfeit the lease. This is often called a ‘pandemic clause.’

How does the court determine the disputed terms of a new lease?

The Court will have regard to the terms of the current tenancy and to all relevant circumstances. In the leading case on this subject (O’May v City of London Real Property Co Ltd) Lord Hailsham said:

‘In deciding the terms of the new tenancy, as to which its discretion is otherwise not expressly fettered, the court must start by ‘having regard to’ the terms of the current tenancy, which ex hypothesis must either have been originally the subject of agreement between the parties, or themselves the result of a previous determination by the court in earlier proceedings for renewal.’

Lord Hailsham added:

‘The words ‘have regard to’ are elastic: they compel something between an obligation to reproduce existing terms and an unfettered right to substitute others. They impose an onus upon a party seeking to introduce new, or substituted, or modified terms, to justify the change…’

‘If such reasons are shown, then the court, applying the words ‘all relevant circumstances,’ may consider giving effect to them: there is certainly no intention shown to freeze, or in the metaphor used by learned counsel, to ‘petrify’ the terms of the lease. In some cases, especially where the lease is an old one, many of its terms may be out of date, or unsuitable in relation to the new term to be granted.’

In the current case, District Judge Jenkins noted that the purpose of the legislation is not to approve amendments which would result in a change to the respective risks, obligations and benefits carried and enjoyed, nor to insulate the tenant against the commercial and trading risks they may face in a way that would either prejudice the landlord or interfere with their long term interests.

The judge added that in his view ‘all relevant circumstances’ could include consideration of: the effects of the COVID-19 pandemic; the government imposed lockdown; and the potential effects of any further lockdowns. The judge noted that the onus is on the party seeking the variation of terms to carry the burden of proof and that he would consider the evidence on the balance of probabilities and by having regard to the current lease.

What were the Claimant’s arguments?

The Claimant argued that:

• the inclusion of a pandemic clause would modernise the lease (by reacting to a lockdown);
• if they were unable to trade, this would present a risk not only to the tenant but also the landlord (being unable to pay the rent);
• it is in both parties’ interests if the tenant can continue to trade and meet its ongoing obligations; and
• that the clause aligns with similar clauses agreed between tenants and landlords recently (and in particular a case involving WH Smith).

How did the Defendant respond?

The Defendant’s argued that:

• there is no market precedent for such a clause;
• the inclusion of the clause would fundamentally change the relationship between the parties;
• in lockdown, the appropriate course for the tenant is to take advantage of any government support;
• in the case of O’May the landlord sought to impose an obligation on the tenant to pay a service charge but the court decided it would not be fair and reasonable to impose that new risk. Here, the tenant was seeking to impose a new risk on the landlord by sharing what is the tenant’s risk to pay rent; and
• there was no justification for a tenant not to comply with insurer’s requirements or for a landlord not to be able to forfeit the lease.

What did the judge decide?

District Judge Jenkins concluded that:

• the imposition of a pandemic clause would not be fair and reasonable;
• the purpose of the Act is not to protect or insulate the claimant (other than to allow them to continue their business following the term end);
• the purpose of the Act is not to redesign previously negotiated risks (even though a national lockdown may not have been in the parties’ minds when they did so);
• there was no reason to impose a sharing of the risk in circumstances where the defendant would have no control whilst the claimant may be able to apply for government support;
• in relation to service charge, the defendant may still liable be liable for costs / expenses during a lockdown but, if not, then no service charge demand would follow;
• preventing the landlord from forfeiting the lease would significantly alter the existing commercial balance between the parties;
• there was no reason to relieve the burdens imposed by insurers and it may put the entirety of the insurance cover at risk; and
• that the case of WH Smith was different because the parties had already agreed on the inclusion of a pandemic clause (but disagreed on how it would be triggered).

What next for pandemic clauses?

More and more tenants will be seeking the inclusion of ‘pandemic clauses’ in their leases. Although Poundland was unsuccessful in this case, new cases may arise where a tenant does successfully argue for its inclusion.

For queries, please contact Simon Painter or Clara Clint.