As we continue to tackle the challenges caused by the spread of Coronavirus and look for new ways of adapting our everyday life, Else solicitors continue to receive regular enquiries from landlords and tenants looking for assistance with their property arrangements.
We have already seen the challenges caused by the pandemic, including the multiple lockdowns, COVID variants and the introduction of the Coronavirus Act 2020. It is therefore essential that landowners and occupiers in all sectors understand the implications in respect of their ongoing rights and liabilities. Below are some of the key issues and concerns facing commercial tenants and landlords:
Can a tenant withhold rent or terminate a lease?
Given the adverse financial impact Covid has had on many tenants, a common question being asked is whether tenants can refuse to pay rent, pay less rent or terminate their lease early.
A good starting point would be to review the terms of the lease in question. The relevant provisions to consider include:
• Any break clause that may be available to the tenant to terminate the lease early;
• Any “force majeure” clause (although these are rarely found in commercial leases and there is no common law right to terminate for force majeure).
Most modern leases will provide for rent to be payable without deduction or set off. In such circumstances a tenant is unlikely to be able to withhold payment of rent due to Coronavirus related reasons unless any specific provision in the lease enables it to do so, or unless it reaches an agreement with its landlord.
Tenants may look to the ‘common law’ doctrine of frustration when the lease provides no express option for early termination. Frustration occurs whenever the law recognises that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.
Commercial leases, like other commercial contracts, are capable of being frustrated. Could a tenant argue, therefore, that its lease has been frustrated as it was impossible to occupy the premises during the COVID-19 lockdown? There may well be scope for this argument, particularly if the tenant was precluded from deriving any practical benefit from the premises for a majority of the term.
Can a landlord forfeit the lease and evict the tenant for non-payment of rent?
Along with other unprecedented measures to protect the public and the economy, the UK government announced on 23 March 2020 that commercial landlords are to be precluded from forfeiting commercial leases and evicting tenants for non-payment of rent. This measure was subsequently extended until 31 December 2020 and then further to 30 June 2021. On 16 June 2021, the Government announced an additional nine month extension until 25 March 2022.
Where a tenant is unable to pay its rent in full, the Government is encouraging Landlords to follow its recently introduced, voluntary, Code of Practice that is designed to ‘promote good practice amongst landlord and tenant relationships.’
Keep Open or Re-open their Premises?
Some modern commercial leases (particularly in the retail sector) contain ‘keep open’ clauses and/or ‘operating/opening hours’ clauses.
As a result of the restrictions that came into effect on 26 March 2020 under the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020, a large number of premises closed to the public. Although most legal restrictions have now been lifted, some business owners remain concerned about exposing their staff and customers to potential health risks, especially since we have seen the coming and going of several COVID-19 variants.
Where a tenant’s lease obliges them to “keep open” their premises while restrictions are in place, it is likely that the coronavirus legislation will provide a defence to a breach of these provisions, especially if it can be established that keeping the premises open would be unlawful. However, it would appear unlikely that a cautious landlord would benefit from the same defence now that restrictions have been lifted.
Business interruption insurance
Calling COVID-19 an “interruption to business” would be something of an understatement. Understandably commercial tenants are looking to their business interruption insurance, as they have had to close their premises, face unprecedented disruptions to their supply chains and deal with the implications of lockdowns and other similar measures.
Most commercial tenants will have taken out interruption cover as part of their usual business insurance packages. A policy will cover the tenant for lost revenue, mitigation costs and increased costs of working caused by certain triggering events. Whether a tenant can rely on business interruption insurance due to COVID-19 will depend on the specific policy.
Unfortunately, most “standard” business interruption cover is only triggered by physical damage to the tenant’s premises or the building of which the premises form part, and insurers will not pay out for losses caused by the COVID-19 pandemic. This will apply to the majority of commercial tenants who will have standard coverage.
However, tenants may have purchased coverage extensions which expand the triggers for cover. All tenants should be conducting reviews of their insurance policies if they have not done so already and should seek advice as to the types of loss covered. This will ultimately depend on the wording of each policy. If there is potential for an insurance claim, that claim needs to be notified to insurers promptly.
Property insurance policies
Landlords will be just as worried about the adverse impact of the virus on their businesses, particularly on the flow of rental income.
Commercial landlords will usually have taken out loss of rent cover as part of their property insurance, and as rent ceases to be paid due to the impact of COVID-19 landlords will be looking to their loss of rent cover for protection.
However, pandemics are very unlikely to be considered an insured risk under a standard loss of rent insurance policy. Loss of rent policies will normally only cover a landlord where its property cannot be occupied due to an insured risk (physical damage to its property or no access to it) and will not provide cover where there is a loss of rental income due to a non-physical damage event.
It is still important to look at the specific policy, as landlords may have purchased extensions to include loss of rent due to the impact of notifiable diseases, or to cover denial of access caused by government action.
Whether you are a landlord or tenant, it is important to understand your legal obligations and commitments; to act responsibly; and not to assume that you are or will be automatically released from your legal obligations under a lease.
In the majority of cases it will remain in both parties’ interests for tenants to withstand the continued difficulties lockdown has caused and continues to cause.
Given the sudden and negative impact on cash flow for most tenants, the most sensible option would be for landlords and tenants to try and agree practical and commercial solutions to navigate the coming months.
We have found that payment plans for when a tenant is properly trading again for rent arrears has been very useful.
Also, if disputes do arise, a good idea is to check whether the particular lease contains any mandatory dispute resolution provisions. An effective dispute resolution clause requires the parties to follow a pre-agreed route to resolution, which can prevent any potential secondary dispute about whether and how the primary issue should be resolved and ensure that the time and costs of dealing with formal litigation are only incurred as a last resort.
Finally, please note that this article aims to provide a summary of the key issues and concerns facing commercial landlords and tenants in these unprecedented times.
Should you require any specific advice – whether from a commercial property or a dispute resolution perspective – please do not hesitate to contact us at Else Solicitors where one of our experienced solicitors can assist you.
For more information please contact our Commercial Property team on 01283 526200.