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COVID-19: Commercial leasehold interests

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COVID-19: Commercial leasehold interests

COVID-19: Commercial leasehold interests

The impact of COVID-19 varies across different businesses and markets, but it is increasingly unlikely that any company will emerge from the pandemic financially unscathed.

As commercial Landlord and Tenant relationships have been put under particular strain at this difficult and uncertain time, we recommend three key ‘tools’ as a starting point to steer clients through the issues which have arisen. Firstly, government guidelines, secondly, lease documents, and thirdly, communication.

More fundamentally, now is the most important time for Landlords and Tenants to act responsibly and cooperate with each other to arrive at outcomes which are satisfactory for both parties. It might be cliché, but we are all well and truly ‘in this together’.

Below, we aim to provide answers and guidance to both parties on some of the most frequently asked questions by commercial Landlords and Tenants at this stage:

I am a Landlord of commercial property.

  • My Tenants are struggling to pay me. What should I do?

As of 23 March 2020, the government announced that commercial Tenants who are unable to pay rent because of the impact of the virus will be protected from eviction. The emergency Coronavirus Act 2020 which was passed on 25 March contains provisions which prevent any Tenant evictions, for non-payment of rent, until 30 June 2020 at the earliest.

"Note that, although Tenants cannot be evicted, this measure does not waive a Tenant’s obligation to pay rent. Therefore, any shortfalls in rent could be recovered after the emergency measures are lifted."

The bottom line here is to cooperate and make room for flexibility (taking into account any obligations under headleases or loan facilities). It is in the interests of both parties that a Tenant’s business is able to withstand the difficulties the virus will bring about. Therefore, commercial and practical solutions are key.

Many Landlords and Tenants are already considering voluntary agreements to last the duration of the virus and make other mutual concessions to maintain their relationships in the meantime. These include paying a reduced level of rent to preserve cash flow, and deferring rent reviews. Both parties must ensure that all these temporary agreements are formally documented for clarity.

  • If I order a deep clean of the premises (whether requested by my Tenant or not), who will cover the extra cost?

The general position in a commercial lease is that the Landlord provides services (including cleaning) and the Tenant pays a fair proportion of their cost. This is particularly the case where a Tenant takes a lease of part of a building and the Landlord retains responsibility for maintaining and cleaning the common parts. Landlords may also have ongoing health and safety responsibilities under COSHH or other legislation, which would include protecting against COVID-19 as a hazardous biological agent.

While the costs of a deep clean would be likely to exceed usual expenditure which is recoverable from a Tenant, it is still likely that this would be viewed in law as a reasonable cost in the current circumstances. Alternatively, additional cleaning costs in the current circumstances may be recoverable in the name of ‘good estate management’ which is commonly expressly provided for in commercial leases.

I am a Tenant of a commercial property.

  • How can I pay my rent if my business is not making money?

As the March rent quarter has just passed, many Tenants are increasingly concerned about their ability to pay the next quarter’s rent given that their businesses have been ordered to close indefinitely by the government. A common question is whether Tenants can hold back on rent payments. The short, general answer is unfortunately ‘no’, but this will depend on the terms of each lease, and Tenants should check them carefully for three things:

  • Firstly, is there a clause which allows for rent payments to be withheld if a certain event occurs (known as force majeure)? Note that force majeure clauses are generally quite rare, and when they do form part of a commercial lease, their definitions differ so as to include events tailored to the particular leasehold property. However, as COVID-19 is a novel and unexpected outbreak of disease, there is consensus (with which EMW agrees) that this will be considered a force majeure Failing this, Tenants may also look to the common law doctrine of frustration for relief, although this is also a high bar.
  • Secondly, does the lease contain a break clause, which entitles the Tenant to terminate the lease early? If so, when is this date, and how far away is it? Make sure to check any requirements to give a certain number of days’ notice of an intention to break the lease, and serve notices in good time in case problems arise with the postal service.
  • Thirdly, Tenants should be alert to any turnover rent clauses, which are dependent upon income being generated from the premises. If the premises is a shop, which has been ordered to close, lack of turnover would mean lack of rent, which would normally constitute a breach. However, it is now increasingly unlikely that a court would impose a penalty for a such a breach, particularly if cash flow problems arise as a result of business closures which have been enforced by the government.
  • I have insurance in place for disruption to my business, but am I covered for loss of revenue as a result of COVID-19?

Tenants should check their insurance policies to see if financial losses due to viruses are covered. Unfortunately, early indications appear to be that COVID-19 is not covered, as it must be expressly named as a risk in insurance policies. However, given that the outbreak was unexpected, it is likely that everybody is in the same position here. Further, insurance companies are making it clear that insurance policies taken out after 11 March 2020 (when the World Health Organisation declared the COVID-19 outbreak as a pandemic) are unlikely to cover for losses caused by the virus.

There is a possibility that Tenants could claim under loss due to an ‘act of God’ if this is a term included in their insurance policy.     

The current circumstances are unprecedented, but our Real Estate team are available and well-prepared to provide advice and contractual protection to clients to enable property transactions, whether ongoing or just starting, to proceed to completion.

GET IN TOUCH

If your business needs legal support with any issues arising from COVID-19, please get in touch with Terence Ritchie.

This article was prepared by Tom Revitt.

All information in this document is accurate at the time of writing. It is meant for general information only and is not legal advice.