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COVID-19 The implications for commercial Landlords and Tenants

As the Government’s plans to control the spread of COVID-19 continue to evolve, with remote working and the closure of pubs, restaurants and non-essential shops, Moorcrofts commercial property look at some of the implications for Landlords and Tenants of commercial premises and some of the options available to those parties to mitigate the current financial pressures.

1. Lease Obligations

A. Payment of Rent
In the absence of a specific “Frustration” clause in Leases (see below), rents and other sums due will continue to be payable whether or not a tenant occupies its commercial premises during the coming months. If a tenant fails to pay the rent, a landlord will usually have the right to forfeit (terminate) the Lease as well as other remedies. With the next rent quarter date (25 March) looming the question of making this payment will be at the forefront of tenants’ minds.

The Government has just announced proposals to prevent Landlord’s from forfeiting leases where tenants are unable to pay the rent due for the next 3 months. This offers a period of grace but the detail of this will need to be reviewed (it will be in the Coronavirus Bill currently going through Parliament) and may need to be extended. Practically, given the current climate, landlords may be reluctant to forfeit leases for non-payment of rent as they will be left with empty premises that they cannot let in the short term and will take on the rates liability for such premises. There is however no guarantee that a landlord will not seek to forfeit the lease after the government’s temporary ban and therefore the question remains, what can a tenant do if it does not have the monies to pay the rent?

Communication with your landlord is key. Although they will be under no obligation to agree to such matters, landlords may be prepared to agree rent concessions (e.g. monthly rather than quarterly payments of rent, a temporary freeze on rental payments or a temporary reduction in rent) if the alternative is the insolvency/bankruptcy of the tenant. A total collapse of the tenant would be a far worse outcome for the landlord than a temporary rent reduction or suspension.

Landlords are likely to look at each proposal on its own merits and would be well advised to formally document any such arrangements so that it is clear that they are only temporary and setting out when the overriding provisions in the lease will take effect again.

B. Keep Open Provisions
Many leases in the retail and leisure industries contain an obligation to remain open throughout the term of the lease. There may be circumstances within which a temporary closure will be allowed, for example where a “force majeure” event occurs but tenants will need to review the terms of these clauses carefully to see whether or not COVID-19 falls within this definition.

It is worth noting however that notwithstanding a keep open obligation a landlord cannot force a tenant to remain open and its remedy will instead be in damages. Some turnover rent provisions also contain penalties for closure of a keep open clause. Given the current situation and the overriding duty to protect the health of staff it may be that Courts will be reluctant to enforce any such penalties or award damages, particularly where total closure of commercial premises has been enforced by the Government.

C. Guarantees
Tenants should not forget the impact of non-payment of rent or non-performance of lease obligations on any guarantee given – particularly where this is an individual as opposed to a corporate guarantee.

D. Business Rates
Business rates are normally payable by the Tenant and will continue to be due, even if premises are temporarily unoccupied due to the current lock down (empty property rates relief only applies where all stock and effects have been removed and the business has ceased to trade from the property). The Government has however introduced a 12-month rates holiday for those businesses in the retail, hospitality, leisure and nursery industries and a grant funding scheme for small businesses with premises with a rateable value of less than £51,000.

2. Business Interruption Insurance
Some businesses will have business interruption insurance and tenants should check these policies carefully to see whether or not losses due to a virus are covered. Unfortunately, early indications suggest that a virus will not be covered by most policies unless specifically mentioned (such policies usually require an element of property damage) but tenants should seek legal advice if there are any provisions for losses due to an act of god/force majeure to see whether or not this will be covered.

3. Termination
A. Many tenants will have agreed break options in their leases and again tenants are advised to check to see whether or not they do have the benefit of these and if so what period of notice is required in order to trigger these. Failure to give the correct notice in the correct form can invalidate the break and lead to a tenant losing the break right completely. If a tenant believes it has the right to break it should seek legal advice to ensure that the relevant requirements of exercise are complied with.

B. In the absence of an upcoming break right there are unlikely to be any other rights for a tenant to terminate the lease early as a result of the current situation. The current legal position is that the contractual doctrine of frustration does not apply to leases (unless specifically set out). The essence of frustration is that something happens following the entering into of a contract for a common purpose that makes it impossible for the contract to be performed. It is unlikely that a total failure of performance will arise as a result of COVID-19.

4. Landlords’ Obligations
Landlords will also be under a duty to comply with health and safety legislation and may now have to close the whole or the common parts of their commercial premises. If these are closed, such that tenants are unable to access their premises, there may be a claim against the landlord, although it may be difficult to prove loss when they themselves cannot occupy the premises due to the Government lock down. At the very least, service charge payments should be reduced or suspended but again this will depend on the exact terms of individual leases.

Landlords could be required to incur additional costs relating to deep cleaning their premises and tenants may be unwilling to pay these costs. The terms of the service charge itself will dictate whether or not the landlord can pass on these costs and again parties should review these terms carefully.

5. Security
The question of security for unoccupied premises must also be considered by both landlords and tenants, depending on their respective obligations. Where there is no keep open clause in the lease it is still likely that there will be obligations on a tenant to secure its premises should they be left unoccupied for any ongoing period of time. Even in the absence of such provisions, landlord and tenants will want to ensure that premises are not damaged by trespassers whilst they are unoccupied.

What Next?
It is clear that landlords and tenants will need to work together to preserve their respective interests whilst at the same time ensuring the health and safety of their employees. The Government will also have to play it part and the announcement today of a temporary ban on forfeiture will certainly go some way to protect business owners but more may need to be done.

Going forwards the impact of COVID-19 may well be that force majeure clauses allowing termination or closure of commercial premises and clauses providing for a suspension of rent in these kind of circumstances will be included in all new leases but only time will tell.

The information above is based on “usual” lease terms. It should be remembered that every lease will have been drafted on its own terms and tenants should check these carefully and seek legal advice if they are unsure as to their liability.

For more information or if you would like us to review the terms of your Lease, please contact our Head of Commercial Property, Julia Ferguson.