As the world struggles to tackle the current unprecedented pandemic, the effects of COVID-19 are rapidly being felt by all. Interruptions to daily life and the inability to access restaurants, shops and offices are causing frustration to many.
As the reader will be aware, the retail sector has been struggling in recent years and fears are brewing that COVID-19 may be the last straw for many retail occupiers. The recent news that Laura Ashley has gone into administration blaming the virus, and H&M, Carluccio’s and Debenhams are asking their landlords for rent holidays, is cause for concern for many landlords.
Based on queries raised by a number of our clients, we have put together the following guidance which we hope will assist landlords and tenants in understanding the implications of COVID-19 on their commercial leases.
A tenant might to try to argue that, if they cannot use their premises during the outbreak, their lease has become frustrated or that ‘force majeure’ applies. Such contentions are unlikely to succeed: these arguments are notoriously difficult to run, as the threshold is so high.
The frustration argument was recently tried in the context of Brexit. In 2019, the European Medicines Agency argued that Brexit had frustrated its lease of premises in London as it had to relocate to continue operating within the EU. The courts disagreed and ruled that the lease had not been frustrated.
Whilst there may have been underlying political reasons for that decision, it is unlikely the courts will accept that a lease is frustrated by the COVID-19 outbreak, despite the potential for COVID-19 to become more far-reaching, serious and unpredictable than Brexit.
However, there may well be test cases on this issue, and we will watch these with interest and update this guidance as appropriate.
Landlords are likely to be approached by tenants asking for a period of rent suspension or reduction if they are unable to operate from their premises as a result of quarantining restrictions and/or staff sickness, or as a result of the government ordering closure of premises. A government order to close premises will not change the underlying contractual relationship between landlord and tenant, even if closure renders it impossible for either party to perform their obligations under the lease.
Unfortunately for tenants, the answer to the above question will generally be no. Most commercial leases state that rent will be suspended where the premises are damaged or destroyed as a result of an insured risk, which is usually defined by reference to a list of standard risks. These provisions will rarely, if ever, allow for a suspension or reduction in rent where premises cannot be occupied due to public health or pandemic issues. In the vast majority of cases, tenants will be unable to rely on the lease to claim a rent reduction or suspension.
Many landlords are however commercially minded and may therefore be willing to discuss measures to help their tenants during this difficult period, with a view to preserving the long term rental income from their premises.
We have experienced landlords and tenants discussing monthly rather than quarterly payments; rent holidays with sums being topped up on future payments, giving cash flow assistance; or even a modest reduction in rent for a certain period of time or conditional on the tenant accessing the government assistance programme set out by the Chancellor earlier this week. Landlords may be willing to agree short suspension periods provided the tenant pays any sums recovered to the landlord.
Landlords can to take this opportunity to offer short term incentives in return for greater future certainty, such as negotiating out future break rights in return for rent holidays. These concessions can be given by personal side letter concession, or in more formal variations to the lease.
Tenants should however be aware that there is no legal obligation on the landlord to entertain any request for rent reduction, and these will only be available if the parties can agree a commercial position.
Whether any loss can be covered will depend on the type of policy and the extent of cover. Traditional business interruption policies may not cover loss arising from the virus as these generally require damage to, or loss of, insured property.
Tenants may however be assisted by the fact that, in England, the government has now declared coronavirus a “notifiable disease”, following Scotland and Northern Ireland. Wales is finalising regulations to do the same. This is a formal classification required by many insurance policies, so those who have business interruption cover may now be able to claim under it, depending on the specific terms of their policy.
We recommend that tenants examine the terms of their policy carefully and seek advice from their insurer.
Landlords remain liable to provide services in the usual way, which may in some cases amount to increased services, for example, more frequent toilet checks and provision of hand sanitising products. Costs incurred will remain recoverable through the service charge and most leases contain a ‘sweep-up’ provision entitling the landlord to recover the costs of whatever additional services are deemed reasonable.
Landlords may have obligations under the Control of Substances Hazardous to Health Regulations 2002 (COSHH) or other health and safety legislation, and so may need to take preventative measures. This could include more frequent cleaning of lavatories, eating areas, door handles and handrails. Guidance from Public Health England or the government in relation to cleaning should be followed (to the extent that this is the landlord’s responsibility under the lease).
Where stockpiling prevents landlords from procuring the necessary materials to provide certain services, lease terms may exempt them from the duty to provide services due to circumstances outside their control. Landlords should check their leases and seek advice where necessary.
If tenants are required to close their premises to comply with a government order, it is uncertain whether they could be held to be in breach of keep open covenants. Indeed, a tenant would be in breach of the standard covenant to comply with statutes if it fails to comply with any directions issued to close premises to contain the spread of COVID-19.
This is uncharted territory. The position is likely to depend on the terms of the individual lease: some keep open clauses may contain exceptions allowing closure to comply with the law. Equally, a tenant is likely to mount a strong defence to any allegation of breach by reference to the relevant closure order.
Commercial leases have not been drafted with the current scenario in mind. The most successful way through this hopefully short-term period is for landlords and tenants to engage with each other in good faith to try to find a solution which supports the original agreement. Each individual situation will of course differ from case to case but we hope this guidance provides a helpful outline for the parties and gives a starting point for landlords and tenants to begin negotiations, if required.
Howes Percival has a range of specialist advisers with expertise in relation to landlord and tenant matters, and more generally the impact of COVID-19 on business. If you have any questions based on the topics raised, or in relation to other commercial property matters, please contact Stuart Burns in the first instance.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.
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