As the Coronavirus pandemic grips the nation the real estate sector, like all sectors of the economy, is starting to assess the potential impact. Events and government guidance is evolving by the hour and inevitably as "social distancing" measures become more widely imposed commercial tenants will start to feel the impact.
Some larger retailers including New Look, Debenhams and H&M have already asked landlords for rent concessions. With the March quarter day approaching other commercial tenants may be seeking similar concessions during this unprecedented period.
Some landlords will be minded to agree rent concessions. However, it is a timely reminder for landlords to consider whether a provision allowing for the termination of the concession for breach of lease will amount to an unenforceable penalty. This was what the High Court decided in Vivienne Westwood Limited v Conduit Street Developments Limited  EWHC 350 (ch).
In this case, the Court held that the provision which allowed the landlord to terminate the rent concession for any breach of the lease by the tenant was unenforceable. Termination of the concession triggered an obligation for the tenant to pay a higher rent both retrospectively and prospectively in addition to interest, costs and damages for losses caused by the breach. The court held that this was a penalty which was "exorbitant and unconscionable" and therefore unenforceable. A penalty clause can exist where a secondary obligation is imposed by the breach of a primary obligation which is a detriment disproportionate to any legitimate interest of the defaulting party.
During these challenging times and as things move at such a quick pace, it is important to give careful consideration to the drafting of a rent concession and to ensure that it does not impose more onerous terms on the tenant which could risk the termination being unenforceable. The parties should ensure that a moderate and measured approach is achieved.