19 March 2020
The effect of the COVID-19 pandemic on commercial leases
In the midst of the current Coronavirus pandemic we have been asked by many of our clients for guidance concerning what seems like an almost inevitable financial crisis or potential full-scale lockdown, which will result in many businesses having to significantly adapt their working processes or close entirely (on a temporary basis). Quite rightly, commercial tenants and landlords are concerned about the impact of these events on their leases and obligations.
In summary, most obligations will likely continue as usual and any changes will very much depend on the wording of the lease concerned. However, we thought it would be useful to provide some general guidance on some of the more common concerns that have arisen.
Obligations to pay rent
Unless your lease specifically provides for circumstances which bring it to an end or for the suspension of rent (for example a force majeure or rent suspension clause) the obligation to pay rent will likely continue despite the pandemic and the likely financial difficulties that will be suffered as a result. In our experience, force majeure clauses are rarely found in leases and rent suspension clauses do not tend to cover pandemics.
Despite this, it will be best practice to check the exact terms of the lease in question.
Having said that, with the impending quarter day, tenants in affected sectors are already asking their landlords for rent holidays. Landlords are not obliged to consider these requests and if rent is not paid without agreement with the landlord, a tenant may be at risk of a landlord taking action against them. However, landlords need to be mindful of their options if tenants cannot afford to pay rent – regaining possession of property in the current climate is not generally going to help. Our advice, therefore, is to encourage a dialogue between landlords and tenants at this time. This is all subject to any new legislation which may introduce, for example, restrictions on landlords seeking to obtain possession of commercial properties during the current pandemic.
All of those affected should carefully check all insurance policies, including any business interruption insurance policies to see if rent may be recoverable under any such policy.
Notwithstanding the above, it may be that;
- In the event of a full-scale lockdown which will effectively force businesses to shut down; and
- In the absence of an adequate force majeure clause or rent suspension provision in the lease;
that COVID-19 may be a considered a ‘frustrating event’.
A frustrating event is typically considered a serious event that occurs after the formation of a contract which is both unexpected and beyond the control of the parties, which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. This is a common law principle and for obvious reasons the courts apply it as narrowly as possible.
We are considering how the doctrine will apply to the unprecedented COVID-19 outbreak, especially if a full-scale lockdown is implemented.
Interruptions to Occupation
Usually tenants will need to notify the landlord if leaving the property unoccupied for a certain period of time.
Tenants are also advised to put appropriate arrangements in place to safeguard the property.
Coronavirus outbreak within a Property
How to deal with lockdown and quiet enjoyment
In the event of an outbreak within a particular property, a landlord may want to restrict the tenant’s occupation. However, the landlord will generally (usually expressly) have given a covenant for quiet enjoyment without interruption. The parties will need to check the lease to see if there are any exclusions to the right to quiet enjoyment but it is very unlikely.
Therefore landlords will not be able to unilaterally prevent tenants occupying a property.
Health and Safety
Landlords may introduce reasonable conditions regarding the management of the building (i.e. by limiting access to common parts of the building which do not provide access to individual tenants’ premises) to stop the spread of any virus.
Tenants are also responsible for the health and safety in relation to their premises and employees.
Therefore, the landlord is unlikely going to be able to apply conditions which are at odds with the tenant’s right to quiet enjoyment or the tenant’s own health and safety obligations.
Landlord Services and Management
Usually landlords are granted relief from the obligation to provide services in circumstances beyond their control. For example, it may be reasonable to say you’re not putting key members of staff on the premises physically because of the risk of infection. That is a circumstance which is likely to be deemed beyond a landlord’s control.
Obviously, if a landlord doesn’t provide services, then the tenant will not have to pay service charges to which they relate, although interim service charge arrangements will still subsist in the absence of an agreement to suspend payments.
Generally speaking leases do not contain provisions that deal with the scenario with which landlord and tenants are currently faced. Landlords and tenants are urged to take legal advice on the exact wording of the lease and the circumstances. Furthermore, both landlords and tenants need to check their insurance policies carefully to see if any of their losses are covered. We also advise both landlords and tenants to work together and start an early dialogue about the various issues that arise.
It is hoped that any businesses affected by the COVID-19 outbreak will take a pragmatic and good faith approach in the face of this very difficult and uncertain situation.