COVID-19 presents a significant challenge for all aspects of society for the foreseeable future, particularly so for landlords and tenants within the retail and leisure sector. So, what does this mean for your current commercial lease?
1. Does the tenant need to keep open the property?
During lockdown most retail and leisure operators were ordered to close. Although many restrictions have now been lifted, there is risk of further local lockdowns or outbreaks that could result in further closure orders. Many leases particularly retail and leisure leases will contain an obligation to remain open although it would also be usual to permit closure where required by law. If such an exclusion is not present, it is likely that it would be difficult for the landlord to enforce a “keep open” clause where it would be unlawful to do so although they could try to seek damages. It is however considered that where the closure is to protect the health and wellbeing of staff and the wider public the court is likely to look favourably on the Tenant especially where the closure is enforced by the Government.
2. What if the tenant is unable to pay the Rents due under the lease as a result of the impact of COVID-19 on its business?
Commercial leases often provide for rents to be payable without deduction or set off. In addition, any rent suspension clause is often limited to physical damage caused to the property, not a virus. As a result the rent suspension provisions under the insurance provisions of the lease are unlikely to cover this unprecedented situation.
In the majority of leases, it is unlikely that the tenant will be permitted to withhold payment of rent for Coronavirus related reasons unless there is a specific provision in the lease. It is possible for the parties to come to an arrangement during this period however this is contingent on the willingness of both parties to work together.
The Coronavirus Act 2020 has prevented commercial landlords from forfeiting commercial leases and evicting tenants for non-payment of rent. This measure has been extended from 30th June 2020 and will remain in place until 30th September 2020. It is important to note that while the moratorium applies, landlords do retain the right to charge interest on the arrears, bring debt recovery proceeding and may have recourse to guarantors and rent deposits. The moratorium on forfeiture is temporary and therefore any rents not paid will remain due once the moratorium has been removed. Data from July 2020 suggest that, despite the easing of lockdown measures in the UK, only a fraction of the rents due were actually paid. It will therefore be interesting to see whether, in the current environment, landlords will forfeit leases in the future and be left empty properties.
What is clear is that an open dialogue between the tenant and the landlord is key. Both the landlord and tenant need to work together and co-operate with each other in order to navigate the current difficult environment.
3. Will insurance help?
It is likely, at this point, that all parties will have reviewed the terms of any insurance policies to assess whether losses due to the current pandemic are covered. Indications suggest the majority of insurance policies will not cover this issue unless it is expressly mentioned.
4. Can the tenant change the business carried out at the Property?
Several businesses are currently trying to adapt their business operations in order to keep trading e.g. café’s offering take away service. Whilst the lease may permit the property to be used for a café it may expressly exclude takeaway food. There may also be planning issues to consider, although some changes from one use class to another are covered by permitted development rights. Tenants considering any change to the their business operation at the property will need to consider whether they will be in breach of planning legislation or the lease if it prohibits any change of use.
5. Can the tenant terminate the lease?
The tenant will need to consider whether there is any break provision within the lease in order to terminate the lease during the term. Most break clauses will be subject to conditions which must be complied with by the tenant when exercising the break. Any failure of the tenant to comply with the terms of the break clause is likely to invalidate the break. Commonly, all rents due under the lease need to be paid in full, this may be difficult if the business has been adversely affected by COVID-19. Often vacant possession will be required however practical consequences of a lockdown may prevent the tenant from giving vacant possession.
A tenant may try to argue that the lease has been frustrated as a result of COVID-19. Frustration of a contract occurs due to a supervening event meaning that the contract is no longer capable of performance. This will be very difficult for a tenant to successfully argue given the general test for frustration sets a high bar. It is also highly unlikely a lease contains force majeure clause permitting termination.
The above is an overview of common clauses contained within commercial leases although a specific review of each individual lease is required as all leases are different. Before taking any action parties should seek to obtain advice from their lawyer who will be able to review and provide advice on the contents of the agreement. In terms of future agreements, it will be interesting to see how the market reacts and what sort of clauses parties seek to negotiate to allocate the commercial risk that may continue to arise as a result of this pandemic or any future pandemic.
Helen Marram, Associate Solicitor, Commercial Property
