On Coronavirus: Commercial Leasehold Properties
March 20, 2020
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1. Non-payment of rent
In the case of non-occupation due to part or whole self-isolation rent is probably still payable. Leases do not usually contain suspension of rent or non-payment of rent in the event of force majeure, but may do where it is a licence of serviced offices and tenants should check the terms and conditions of their agreements.
Cover may be provided for recoverable rent under a business interruption insurance policy as Covid-19 has been classified as a ‘notified disease’ if a tenant vacates the property.
A tenant may have to inform the landlord that the property will be unoccupied for a certain period of time and appropriate security arrangements in place to safeguard the property.
The tenant’s lease obligations will continue to apply. but a landlord has no duty to offer any concessions to the tenant in respect of their obligations in the lease.
2. Temporary closure
Tenants are allowed to temporarily close their premises unless their lease contains keep-open provisions which would then need to be reconciled against the tenant’s obligation to comply with government guidance. If the government issues emergency legislation imposing curfews, or an outlet is forced to close because the majority of its staff are self-isolating, it is likely that the statutory provisions covenant would ‘overrule’ the keep-open clause. A landlord’s only remedy for breach is likely to be damages, rather than being able to force the premises to re-open.
3. Rent suspension
Tenants who are unable to use their premises may look to secure a rent suspension for that period. Most commercial leases only allow such a suspension of rent if the premises are damaged, destroyed or unusable due to an insured risk. COVID-19 would not be included as such circumstances would not be covered as an insured risk in commercial leases.
The tenant will need to ensure all rent and other payments under the lease continue to be paid without deduction or set-off in the usual way and subsequently look to business interruption insurance to cover losses suffered over this period if applicable.
4. Proactive Management
While the requirement to continue paying rent and adhering to other obligations is clear, we are facing an unprecedented set of circumstances, which are going to test everyone’s resilience and ability to respond flexibly.
Many businesses and individuals are likely to suffer serious short-term cash flow issues as a result but may be capable of quickly regaining momentum once the crisis has passed. The government have and are seeking to put measures into place that will assist businesses with cash flow. In return, they are looking to landlords to offer some flexibility and patience to their tenants.
It is particularly important for landlords to proactively manage their portfolio during this time by maintaining a regular dialogue with their tenants. A little pragmatic flexibility in the short-term may well significantly increase prospects of a full recovery the last thing most landlords need at this time of economic uncertainty is insolvent tenants and extensive voids.
It is worth considering reasonable short-term variations to rent and other payments as a viable option to retain and maintain profitable relationships. Such variations should be carefully documented to avoid any unintended impact on other rights under a lease. This may be done effectively by side letters, which should set out that variations are only for limited times and permitted ‘without prejudice’ to the terms of the tenancy. They key is to avoid inadvertently making any long term variation to the terms of the lease.
1. Quiet enjoyment
The ‘quiet enjoyment’ covenant in a lease cannot prevent tenants from accessing or occupying their premises, so a tenant affected by coronavirus cannot normally be asked to leave. Landlords may however introduce regulations for the management of the building which normally must be reasonable, so that access to common parts of the building could be limited to stop the spread of the virus.
The majority of commercial leases permit a landlord to restrict access to common parts of its building in an emergency. What will constitute an emergency is of course dependent on the facts. If the COVID-19 pandemic continues to escalate and a landlord decides to close common parts of its building to protect its tenants and the wider public, it may be difficult for an aggrieved tenant to establish that the landlord was acting unreasonably and outside of an ’emergency’ situation. The landlord’s position would be strengthened if the government were to issue emergency legislation, recommendations or guidance severely restricting access to public spaces.
2. Provision of services and staff
Landlords would be granted relief from the obligation to have to provide services in circumstances beyond their control – e.g. having to have a receptionist on the reception desk because the risk of them being infected by coronavirus which is beyond the landlord’s control. With hotels and offices, where services such as cleaners would normally be provided, leases may state that if services are permitted to be suspended and whether these must restored, and whether immediately or as soon as reasonably possible.
Landlords are obliged to keep tenants safe, but this will probably not extend to deep cleaning or provision of more frequent and meticulous cleaning services in the event of an outbreak of the virus in the building, as the provision of services not specifically described in the lease as ‘services’ is likely to be at the landlord’s reasonable discretion.
Taking all reasonable actions to provide the services in accordance with the principles of good or best estate management is generally accepted, and plans for deep-cleaning and closing areas that are not to be accessed could fall into these actions especially in larger multi-occupied properties. Recoverability of these additional costs through the service charge will depend on the terms of the lease and may be best discussed and agreed with the occupational tenants.
Some service charge clauses also refer to recovering costs that a landlord has incurred in complying with ‘applicable laws’. This may become relevant if the government issues emergency legislation or guidelines on cleaning public areas in the future.
Landlords should review their service costs now and then again in the long term anticipating how they can afford and limit service costs in the event that there are some more extreme measures over the coming weeks – flexibility to cut back on services, or terminate or suspend agreements with service providers, in the event of closures.
3. Emergency Legislation
The general consensus seems to be that events are happening so quickly that emergency government legislation, including the closing of specific buildings, cities and geographical areas could be brought in at any time, that would supersede the normal reasonable obligations.
Landlords could argue that such action is similar to a tenant’s obligation to comply with statutes, notices and orders of competent authorities which are standard provisions in the majority of commercial leases. However, if a landlord wishes to temporarily close premises or require a tenant to vacate, without government mandate, such action might bring be regarded by a tenant as derogation from grant or breach of quiet enjoyment – or even an act of forfeiture – so careful consideration of the terms of the lease should be considered.
The most practical solution is for both the landlord and the tenant to regularly communicate with each other. Landlords should also check insurance policies and, where needed, seek professional advice. Most insurance policies are related to property damage, but there are a few policies which also cover the impacts of an epidemic.
It would seem that neither landlords or tenants will be able to terminate their leases as a result of by claiming force majeure or frustration. Current thinking is that force majeure for COVID-19 cannot be claimed and it is unlikely these circumstances would be anticipated in many leases.
Any negotiation of commercial leases in the coming weeks will pay close attention to the obligations of the parties in relation to COVID-19, as well as any future events of a similar nature. It may be that ‘force majeure’ clauses start to become more commonly requested by tenants seeking to enhance their ability to terminate a lease in such unforeseen circumstances.
All landlords and tenants should keep up to date with the daily announcements by the UK government, guidelines being issued, new emergency legislation and the WHO recommendations.