As the situation surrounding COVID-19 continues to develop at speed, nearly every area of business is facing disruption of some kind. This is particularly true for commercial landlords and tenants, especially those in the leisure and hospitality industries.
Already there have been reports of a major food retailer writing to its landlord to request a three-month rent-free period. Others are using foot-fall counters to provide evidence for rent reduction requests.
What do commercial landlords need to consider?
Many commercial landlords will be dealing with – or preparing to deal with – disruption resulting from the virus outbreak. Key elements to address now include:
- Tenants attempting to end their leases early
While tenants may try to claim that due to COVID-19, their lease has been frustrated, it is unlikely they would be successful. Historically, courts have taken a very restricted view on frustration – a claim by a Tenant that Brexit frustrated their lease was rejected by the courts last year.
Unlike the majority of commercial contracts, force majeure clauses are extremely rare in commercial leases (although this may now change), and so it is unlikely that tenants would be able to use this as a way to end a lease.
The current situation may result in a host of new CVAs or in tenants becoming insolvent. Financial difficulties such as these could trigger the Landlord’s ability to end the lease early and may lead to conversations where a short term rent suspension is agreed, despite not being provided for in the lease.
The majority of rent suspension clauses require a level of material damage or destruction to the premises which are let and are not triggered by a material change in the tenant’s business or the wider economy. As the fall-out from COVID-19 is likely to be financial, a typical rent suspension clause would not apply.
If a tenant has negotiated different terms, then such leases would be considered on a case by case basis.
If there is an outbreak of the virus at a landlord’s multi-let property, it may be appropriate for them to close or restrict access to the building. While this may not be in line with all tenants’ wishes, and they may try to claim derogation from grant, most commercial leases allow landlords to change the areas over which access is granted and in some cases even restrict access in emergency situations, especially when following advice from the Government.
Where a tenant occupies part of a building, the landlord undertakes responsibility for cleaning. While there is no legal requirement for landlords to carry out extra cleaning due to COVID-19, many landlords are taking precautionary measures and deep cleaning premises or cleaning more often. Costs for such extra services may be recoverable under service charge clauses and the terms of any agreements will need to be considered to ascertain if such costs are recoverable.
Commercial landlords are obligated to take reasonable measures to protect the health and safety of both their tenants and anyone entering the building. It would be wise for landlords to undertake a full risk assessment in light of any concerns about the virus.
- Negotiating future leases
Going forward, it would be sensible to look closely at obligations in relation to the impact of COVID-19 when negotiating any commercial leases. In addition, it may be that clauses which allow for a rent reduction or rent suspension in the event that there is a “materially adverse change” to the tenant’s business or an event which causes the tenant to stop occupying the premises during the term may start to become standard requests from future tenants.
- The Government will be introducing emergency legislation banning landlords of commercial property from evicting commercial tenants who fail to pay their rent. The amendment to the Coronavirus Bill on commercial leases will apply to England, Wales and Northern Ireland and will be applied to all commercial tenants.
The change will come into force when the Coronavirus Bill receives Royal Assent. It will last until 30 June, with an option for the Government to extend if needed.
What should tenants be considering?
Commercial tenants will of course be equally disrupted by the spread of COVID-19, and any steps put in place to mitigate this. Following the most recent announcement from the Government, any pub, club or restaurant will need to act fast to try and minimise disruption. In terms of commercial leases, this should include considerations around:
The Chancellor of the Exchequer recently announced a raft of support for businesses during this time of crisis, especially those in the leisure and hospitality sectors. The exact help available will depend on individual circumstances.
- Business interruption insurance
While tenants may not be able to get out of their lease early or cease paying rent to their landlords due to COVID-19, they may well be able to recover rent under their business interruption insurance. Every policy will be different and not all will allow a claim
Tenants, especially those in the retail sector, need to be aware of breaching their keep-open covenant. Many may feel they are stuck between a rock and a hard place as their lease will also state they need to comply with official guidelines, which in this case could force them to close.
In this situation, it is likely that any Government order will override a keep-open clause. However, tenants must communicate with their landlords and managing agents if they are closing and will not be in occupancy of the building for a length of time.
The vast majority of businesses are currently in unchartered waters, and the situation is changing on a near hourly basis. If you have any questions, our legal experts are here to help.