Pre, Peak And Post Covid Rents – Are We Finally Seeing Rent Decreases As A Result Of Covid?

18th January 2022

Pre, Peak And Post Covid Rents – Are We Finally Seeing Rent Decreases As A Result Of Covid?

Nyree Applegarth, Partner in the Higgs LLP Dispute Resolution and Litigation team, looks at how Courts are determining new rental levels or interim rents as the Covid dust beings to settle.

As we enter the third year of life blighted by Covid, there is an air of Groundhog Day around, but 2022 might be the year that we finally start to see the true impact of the pandemic on commercial rental levels. 

As is always the case, there were a number of ongoing lease renewals passing through the Court process when the pandemic started in 2019 but it is only now, some two years after premises were forced to close, that we are starting to see how the Courts are determining new rental levels or interim rents payable by tenants which relate to the period from March 2020 onwards. 

An example of this is a recent County Court decision in a case where the Court was charged with determining rent and interim rent for a lock up shop in Kensington.  The claim for a new tenancy had been issued in April 2019 but was not heard until October 2021.  The unit concerned traded as a retail area selling pet foods and accessories and the basement area was used for pet grooming.  Expert evidence was produced on both sides in relation to the amount of new rent payable under the lease and the rent payable as an interim rent.  There was a fundamental difference of opinion between the experts in relation to the pandemic and its effect on the market for shop lettings.

The tenant’s expert was of the view that pre-pandemic comparable transactions were no longer relevant because, at the beginning of 2020 and before Covid was even in our conscience, retail letting markets were altogether different and in most cases, values were higher.  He was of the view that it was difficult to challenge that view given that there were thousands of shops that had closed permanently and closures that were still ongoing and that even in Central London in prime locations, there were a number of vacant shops with low demand and doubts about when most of the shops would be re-let and at what rents.  He counted between 17 and 20 unoccupied units in Kensington Church Street in September 2021 of which three were closed, possibly permanently.

In contrast, the Landlord’s expert sought to argue, having analysed rents for the local area that for the period from the start of the pandemic, there was strong evidence to suggest that market rents had recovered to substantially where they had been in 2019, although he was mindful of the fact that it was the Court was setting the new rent for the next five years. 

When setting the new rent, the Court determined that any pre-pandemic comparables for rent should be treated either with extreme caution or simply ignored.  This was because it had been evident that there had been intense disruption to the economy and shopping habits following the pandemic and that there was going to be considerable uncertainty regarding commercial rents going forward.

The landlord’s expert had sought to argue that people had tended to shop more locally rather than going to shopping destinations and that this favoured a retailer in Kensington Church Street in the future, but this was not deemed sufficiently persuasive by the Court.  Instead, the Court took the view that the pandemic has had a depressive effect on rents and that there is still considerable uncertainty amongst retailers and prospective retailers as to what the future holds for them.  Therefore, despite the landlord’s expert contending that the new rent should be £45,000 the Court determined that the new rent would, in fact, be £28,350 a year. 

The Court then went on to look at interim rent.  That is generally assessed as the same as the new rent but in this instance, the Court was looking at an interim rent which spanned a period from April 2019 to early 2022 and concluded it was likely to be substantially different from the new level of rent imposed under the new lease.  The Court took a broad-brush approach in relation to interim rent and given the uncertainty of the period in question, set the interim rent as £30,550. 

This case is interesting because it is one of the first examples of how the Courts are likely to determine new rents and interim rents but does seem to indicate that the Courts are now likely to take an intuitive view across the state of the market generally.  The Court was unpersuaded by the expert’s use of comparable examples, especially where they considered that they were outdated and any landlord’s surveyor therefore needs to think very carefully about the comparables they choose to rely upon. 

This case also suggests that a landlord is going to need very compelling evidence to rebut the now general view that there has been an enduring impact on the retail sector, in order to avoid significant rent decreases. 


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