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COVID-19: The Impact on Commercial Leases- a guide for Tenants

01st May 2020

Since the introduction of the Government’s ‘Stay at home, stay safe’ policy to tackle the Covid-19 pandemic, those of us who are able to work from home have done so. However, not everyone has this option, and many businesses have been forced to close, while others are suffering from the immediate financial damage caused by the loss of trade, the enforced change in our spending habits, and how we are currently obliged to live our lives.

With the introduction of the Coronavirus Act 2020 which came into force on 26 March 2020 (“the Coronavirus Act”) and the uncertainty created by the current economic hibernation, landlords and tenants will both be looking at their leases, and thinking about the steps they could to help preserve their business, look after the landlord and tenant relationship and address any immediate cashflow issues.

The following points may be of interest to Tenants of Commercial Properties:

Rent

Review your lease and, if need be, seek legal advice from specialist lawyers about the terms concerning rent and service charge payment if they are unclear, particularly with regard to the strict obligations, or the implications of non-payment.

Some modern leases include provision for the tenants to stop paying rent and in some circumstances to even walk away. However often, this ability is usually heavily restricted, subject to conditions and does not customarily address a pandemic scenario.

Whilst the Coronavirus Act states that relevant business tenants cannot be evicted for non- payment of rent during the quarter due to end on 30th June, it does not give tenants the right to unilaterally stop paying rent.

Initially tenants should speak openly to their landlord to try and reach an amicable agreement – be it to switch from quarterly to monthly rental payments; asking for a rent-free period; a rent reduction or an agreed payment holiday.

The Government is encouraging tenants and landlords to negotiate openly and in a spirit of collaboration, especially as the gravity of the situation we find ourselves in is being faced by the whole business community. This does not however mean that landlords can be forced to agree any variation.

It is worth noting that interest is usually payable on any arrears, and in some cases delayed payments, and this will likely still accrue on any unpaid sum unless there is agreement to the contrary.

  1. Other Lease obligations

Many businesses are currently prohibited from opening as a result of the guidelines imposed by the Government. This does not however automatically terminate tenant’s obligations under their lease which will continue unless otherwise agreed with the landlord.

Tenants should check their leases for the following:-

  • An obligation to ‘keep open’ at certain times;
  • Requirements relating to insurance;
  • Requirements relating to occupancy and/or the security and safety of the premises;

Some tenants may find themselves inadvertently in breach of these sorts of provisions, purely because of the enforced shutdown, and they should tell their landlord immediately if this is the case – particularly as this may require the input of the Insurers.

  1. Force Majeure and Frustration

The effects of Coronavirus have raised the question as to whether ‘get out provisions’ such as force majeure and frustration can be pursued. “Force majeure” is a legal term meaning, briefly, an act of God, or external event out of the control of the parties to a contract which may bring it to an end, or modify the obligations in the contract. A lease is of course just a special sort of contract. “Frustration” in this legal sense means, briefly, that a contract can be ended if the reason for its existence comes to an end

It would be unusual for a commercial lease to include a force majeure provision.

However, if you find that you do benefit from such a clause it is worth considering if it would help in the current crisis. Unfortunately there is little guidance available now regarding force majeure and COVID-19, as there are no direct precedent cases to rely on.

Again it is very unlikely a lease will contain an express frustration clause. Even so, it is still theoretically possible for a tenant to argue that their lease has been “frustrated”, but this will be notoriously difficult to prove in legal terms. A tenant must provide solid evidence that due to an completely unforeseen event (which is not their fault) the terms and obligations under their lease can no longer be performed as they are now radically different from those which were agreed. The current academic thought is that it will be difficult for tenants to successfully claim that their lease has been frustrated, as opposed to just being more onerous, by the pandemic.

  1. Bringing Leases to an end

There will be some tenants who will struggle more than others and those who find themselves in a dire position are likely to be looking to terminate their obligations completely, or at least pass them on to a third party. Tenants will need to review their leases to see whether any of the following are provided for:

  • Break Clause: a conveniently timed break clause may be available to some tenants and this will be provided for in the lease. If this is available, the tenant will need to serve formal notice on their landlord strictly in accordance with the lease. This will secure a way out of any future rent and other lease obligations. A break clause is usually subject to conditions, defined timescales and typically only for a certain date. This is worth checking as a matter of urgency so that you can diarise the appropriate date/s, particularly as time is often of the essence to serve the notices
  • Surrender: tenants could attempt to negotiate to surrender the lease back early to the landlord, thus bringing the lease formally to an end. Take note that a surrender will only be secured on terms agreed by the landlord and the landlord is within its rights to request compensation (there is no obligation on your landlord to act benevolently in these circumstances);
  • Assignment or Underletting: if a surrender is not available, the tenant could look to secure another tenant to either transfer (assign) their lease to or sublet it to. If successful, the lease will often require the landlord’s consent to an assignment or an underletting. Tenants will need to bear in mind that many leases provide the landlord with the ability to place their own obligations, such as an authorised guarantee agreement in which the current tenant will guarantee performance by the new tenant so they will still fall foul of the obligations of the respective lease if the new tenant cannot uphold these. The Tenant may of course, find the current market for premises is turbulent due to the uncertainty we are experiencing, so the advice of a Commercial Agent might be valuable at an early stage.
  1. Lease Renewal

A fear of many tenants is that if they fail to pay the rent on time, their landlord will use this as a reason to delay or reject any application for a lease renewal.

If a lease benefits from the security of tenure protection of the Landlord and Tenant Act 1954 (the “1954 Act), then the landlord cannot use the delays in paying the rent over the next three months as grounds to oppose the lease renewal under the 1954 Act – as non-payment must be “persistent” for the landlord to prove the ground for opposition. So those tenants who benefit from the protection of the 1954 Act should consider their options at this time and consult a Commercial Surveyor to see whether there is advantage to be had in formally triggering the renewal process and/or gearing up for making application to the Court for an interim rent order to benefit for an earlier reduction in rent if the landlord is failing to engage in discussions.

Tenants whose leases have been ‘contracted out’ (excluded) from the protection of the 1954 Act will not benefit from the right to remain in occupation at the end of the lease. If their lease is due to end imminently the tenants should take this opportunity to be open with their landlords if they are currently uncertain about committing to a new lease – short term options, such as a Tenancy at Will or an extension of the length of the existing lease may be agreed by a sympathetic landlord. Tenants should not ‘bury their heads in the sand’ and avoid the matter as without the protection of the 1954 Act they might find themselves on the wrong side of an action for trespass at the end of their lease.

  1. Insurance

Tenants should check their own insurance policies to ascertain whether the losses due to Coronavirus are covered. This is not only in relation to buildings insurance but also wish to check general liability insurance, loss of rent policies, business interruption policy, crisis management insurance and mitigation insurance. The Association of British Insurers has reported that many policies for business interruption have specifically excluded infection diseases resulting from Coronavirus, however this is not a blanket exclusion and so it is always worth checking the individual policy.

  1. Common parts and Centres

If the landlord decides to close a centre of which the tenant’s premises form part, or any common parts, tenants should check their leases to find out the landlord’s obligations as this could potentially give rise to a claim against the landlord.

Please note that this guidance note has been prepared as at 1 April 2020 and reflects the current guidance made available to us at this time. The situation with Covid-19 is particularly fluid, with a multitude of Government regulation and guidance made publicly available daily. We cannot guarantee the accuracy of the information as at the date you are reading the guidance and you should follow up on any matters of concern to check the current available guidance.

Aimee Ellery. Solicitor, Commercial property department.

 

George Ide
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