Commercial leases & COVID-19Apr 07, 2020
Landlords and tenants are facing a number of challenging issues around commercial leases, as a result of the COVID-19 pandemic. Perhaps the most central issue is that of payment of rent. For tenants, this typically represents one of the largest costs to their business. For landlords, a clear rental income is their business.
We set out below some of the more common issues our clients are raising with us, and our views on these.
Commercial leases do often contain provisions for rent suspension in certain circumstances. However, these are almost always limited to the scenario where the premises cannot be used or accessed due to damage caused by insured risks. Unfortunately this does not offer the tenant any assistance in the context of COVID-19 as there has been no physical damage to the premises. Certain leases extend these provisions to damage caused by uninsured risks too (typically risks for which insurance is no longer available in the insurance market), but again, this offers no assistance as there has been no physical damage to the premises.
Force majeure provisions in contracts operate so as to effectively suspend the parties obligations in the event of some intervening event arising outside the control of either party to the contract. For example, extreme weather conditions. Generally, commercial leases do not contain force majeure provisions, so neither landlord nor tenant would realistically be able to argue their obligations under the lease are suspended. In this context, the Courts will be unlikely to imply a force majeure clause into a lease.
The doctrine of frustration sets a very high threshold for the party seeking to rely on it. In essence, that party would need to demonstrate some intervening illegality or failure of common purpose that renders the performance of the lease impossible or so radically different from the parties’ expectations that frustration is justified. There have been no reported cases in England where frustration has been successfully invoked in the context of leases. Most recently, the High Court rejected this argument where the tenant, European Medicines Agency, sought to argue that Brexit had the effect of ‘frustrating’ the lease.
Business interruption insurance
This will very much depend on the terms of the individual policy so it is certainly something that should be checked. As of 5 March 2020 COVID-19 became a notifiable disease for insurance purposes (a pre-requisite for any claim to be substantiated).
Coronavirus Act 2020
The above comments will not be particularly comforting reading to commercial tenants. However, there is some good news in the protection afforded by the Coronavirus Act 2020 (“the Act”). The Act affords protection for commercial tenants against the landlord bringing forfeiture proceedings where the tenant has been unable to pay rent due to COVID-19. This protection period currently runs to 30 June 2020, but may be extended.
It should be noted that this is not a payment holiday or the equivalent to rent suspension, but instead protection from eviction which operates as a moratorium. As such, the tenant remains liable to pay the rent, and should it not do so, the landlord would be able to bring forfeiture proceedings once the moratorium expires. It is not quite clear what would be required of the tenant to demonstrate that it is unable to pay rent due to COVID-19 and it might be further guidance from the government is necessary here.
One further point to note about the Act is that it affords the Government the ability to enforce restriction to, or closure of, buildings. The impact this would have on the lease arrangement is unclear, but both landlords and tenants should monitor the Government guidance on this as and when it materialises.
The key for commercial landlords and tenants in minimising the impact of COVID-19 for both parties is to open a dialogue with each other – there is after all the common goal that the tenant’s business survives the pandemic. Many landlords will be amendable to some form of rent concession if it ensures it will still have a tenant at the end of the lockdown. The concession may take the form of a rent free period, rent reduction or deferral arrangement – possibly in exchange for the tenant committing to an extension to the fixed term of the lease.
Either way, ongoing communication between the parties will represent the best way forward and give both the best opportunity to get through the lockdown period with minimal long term damage.
Nick Winslet heads up Nash & Co’s Commercial Property team, and would be very happy to talk you through your options and answer any questions you may have. You can email Nick at [email protected] or call him on 01752 827013.