COVID-19: Issues for landlord and tenants of commercial property created by the pandemic
By Adrian Price
As the unprecedented disruption to normal life created by the recent government lockdown on vast swathes of the high street and many other forms of commercial property continues unabated, landlords and tenants are faced with difficult decisions to make in respect of their lease obligations, and in particular the payment of rent and other charges under their leases, while tenants are unable to use and occupy their premises.
As ever with such matters, the starting point for each party will be the terms of the lease itself, and it is therefore crucial to examine the terms of the lease carefully to ascertain what obligations are binding on each party and what options are available to mitigate any losses.
It is also important to consider the type of property, its location and use, the nature of the tenant’s occupation and business and whether or not the landlord has an enhanced role in relation to any common parts of the premises, as all of these factors will throw up different issues to consider for both parties.
In this article we look at some of the most important points for landlords and tenants to consider at this time of unique disruption and difficulty.
As mentioned, it is imperative to check the terms of your own lease and other ancillary lease documents to see what specific circumstances and wording apply in any individual case, but we set out below the most commonly encountered position in the majority of commercial leases in relation to the following areas relevant to the current COVID-19 outbreak:
Rent and Rent Suspension - while most leases contain rent suspension provisions, these are normally only triggered by damage caused to the premises by a defined insured risk and given that no damage is likely to have occurred it is doubtful that these provisions will have been triggered even if a COVID-19 outbreak were to fall within the list of defined insured risks, which in itself is highly unlikely. Furthermore, most leases will contain wording preventing a tenant from withholding, offsetting or deducting sums reserved as rents in a lease, and so in the majority of leases it is unlikely that, from a purely contractual perspective, tenants would unilaterally be entitled to withhold rental payments.
Uninsured Risks – some leases contain rent suspension provisions relating to uninsured risks, and it is important to check the lease to see whether these provisions would apply in respect of the current outbreak. More often than not, however, as with insured risks these provisions normally also require damage to the property to have occurred and so, again, in the majority of cases, they are unlikely to assist a tenant with any automatic suspension of rent in respect of closures due to COVID-19.
Service Charges – likewise, it is likely that tenants will continue to be obliged to pay service charges and landlords will remain liable to provide services to properties where leases include such service charge obligations. If the landlord is required to provide more intensive services, such as deep cleaning, the tenant is likely to be required to pay for extra cleaning costs through the service charge. Most commercial leases have a general sweeper clause that allows a landlord to recover all reasonable costs through the service charge and this is likely to cover extra cleaning, although as always this would need to be checked.
Insurance – it is important for both parties to check the lease insurance provisions to see what obligations are incumbent on each party, but as outlined above these are likely to be restricted to rent suspension provisions relating to damage to property rather than inability to access the property due to government ordered closures or pandemics generally.
Force Majeure Clause – some contracts contain ‘force majeure’ clauses, which alter a party’s obligations under that contract in the event of an extraordinary event beyond their control taking place, but these are not usually found in commercial leases - although it is important to check the lease wording to make sure.
Common Parts - depending on the terms of the lease, a landlord may be entitled or obliged to restrict or close certain common parts. As a result, tenants should review their leases to check whether service charge payments can be reduced or suspended.
Staying Open - parties need to check to see if there is obligation on tenants to keep premises open during normal trading hours. Many allow closure if opening is not possible due to circumstances beyond the control of the tenant. If such an exclusion is not present, then landlords might be able to seek damages for breach of covenant, although that may be difficult to prove in the current position where other tenants will be closing for identical reasons.
Break Clause – it may be possible for a tenant to terminate their lease if it contains an impending break right in favour of the tenant. Such a break right is likely to be dependent on the tenant being up to date with payment of rents, which will mean ensuring all rent is paid during the current lockdown period, and indeed terminating the lease may not be what is ultimately desired by the tenant, but it will at least be a rare contractual option for tenants to stem the flow of rental liability and / or provide tenants with a bargaining chip in discussions with landlords for rent concessions.
Rent Deposit – if the tenant paid a rent deposit at the start of the term, the landlord is likely to be able to access this deposit to cover any rental shortfall in the event of the tenant choosing to withhold any payment of rent during the current lockdown.
The Government has recognised the immense difficulties the recent lockdown has caused tenants who are unable to access and open their premises to the public or otherwise use them for the purpose intended under the lease, and announced on 23 March 2020 that commercial tenants who cannot pay their rent because of COVID-19 will be protected from eviction.
An emergency Coronavirus Bill is currently going through Parliament which will mean no business will be forced out of their premises if they miss a rent payment in the next 3 months.
The technical provisions giving effect to this announcement are awaited, but it is likely to suspend any landlord’s ability to exercise their right to forfeit a lease during the said 3 month period and may contain further provisions to protect tenants and their businesses at this time.
Position in Practice
With tenants’ income streams decimated by recent events, it is unsurprising that tenants are swarming to their landlords for assistance in meeting their rent obligations while the lockdown continues and the economy is effectively put on hold.
As can be seen above, in the majority of cases the lease terms are unlikely to provide the tenant with any significant assistance in terms of mitigating their losses and / or forcing their position with landlords and many of the landlord’s usual remedies to take action for recovery of rent and service charge arrears will continue to apply, including court action for rent arrears, seeking damages, invoking the statutory Commercial Rent Arrears Recovery process or forfeiting the lease (subject to any suspension of forfeiture rights by the Government as mentioned above).
However, increasingly landlords are recognising that, irrespective of the strict contractual position, it may be very difficult in pursuing tenants for rent arrears when their income is not there and indeed they may question the wisdom in forfeiting a lease and being left with an empty property that may be difficult to let, at least in the short term.
Moreover, there is a sense that it is commercially expedient during these unprecedented times to work together to try and find a mutually agreeable solution to allow both parties to weather the storm, and so while balancing the landlord’s own needs to protect its own income stream and obligations to lenders and other third parties, the following are some of the options that are available to landlords and tenants at this time:
Monthly rent payments – most leases require quarterly payments, whereas a monthly payment can help with a tenant’s cashflow without actually reducing the rent in any way.
Rent concessions – some landlords may agree either a partial or complete reduction in rent for a specified period. For instance, there is already market evidence of certain landlords agreeing an initial 3 month waiver of rent in London for retail and hospitality tenants, those being the worst affected by the current lockdown.
Rent suspension – landlords may agree an immediate rent suspension now for an agreed period with any rental shortfall to be made up over the remaining period of the lease.
Break right – landlords may agree a more limited rent concession now, but agree a variation of the lease to allow a tenant’s break right to allow tenants more time to assess future developments and terminate the lease at an agreed later point if necessary.
In all cases, both parties would be advised to seek legal assistance in documenting any such arrangements, either by way of side letter or formal variation of the lease.
Whatever the stance of either party in connection with such issues, we would advise tenants to contact their landlords as early as possible to discuss options if they are encountering difficulties with payment of rent during this difficult period.
While all matters will turn on their own circumstances, and so it will never be a ‘one size fits all’ approach, this will at least allow both parties to explore their respective positions at the earliest possible juncture and provide the maximum amount of time to deal with any issues and put in place any agreed plan of action.
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This article is for general purposes only and does not constitute legal or professional advice. It should not be used as substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.
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