As we adapt to the changes that the coronavirus (COVID-19) is forcing on every aspect of life, we have compiled some FAQs on issues that may arise for commercial property landlords and tenants.
According to Ian Cowan in the commercial property team with Richard Reed Solicitors in Sunderland, ‘This is a rapidly changing situation and many of these problems are completely new. Each situation will depend upon the details of your lease terms, so please contact us for specific advice as you need it.’
You should check the Government website for the latest guidance in conjunction with this article, as the guidelines on the coronavirus (COVID-19) are changing daily.
Q1: If the premises let to a tenant have to close, will the lease be frustrated and come to an end?
Probably not. It is very difficult to establish under UK law that a lease has been frustrated, because the land itself still exists and can be used for something, even if not its intended use. Although tenants may not be able to carry on business at present, this is probably not enough to establish that a lease has been entirely frustrated, as the current interruption is likely to be temporary.
Q2: What is force majeure, and will it apply here?
In a general sense, ‘force majeure’ means events that the parties to a contract did not foresee and that are beyond their control. If a force majeure clause applies, the parties may not have to perform the contract as originally agreed. The problem is in deciding whether a particular event (such as COVID-19) is covered by the clause. Some contracts will have a detailed definition, so this is the place to start. There may also be a list of exclusions. Other clauses just have a general reference to force majeure, which makes them harder to interpret.
It is unusual to see a force majeure clause in a lease, although there may be one which says that the landlord need not provide services if prevented by force majeure. They are more common in building contracts, where they may entitle contractors to apply for extensions of time.
Q3: Can a tenant stop paying rent?
This will depend on what the lease says about when rent may be suspended but most leases will not provide for the current situation. Rent suspensions (often called rent cessers) usually apply where the property is unusable because it has been damaged by an insured risk. Although the impact of COVID-19 is immense and unprecedented, it is unlikely to constitute damage to the property. In practice, the landlord may be willing to agree to a temporary switch to monthly rent (instead of quarterly) or even a rent holiday for a fixed period. Arrangements like this must be carefully drafted, so speak to your solicitor first.
Q4: Is the Government doing anything to help commercial tenants?
Yes. As well as a holiday from business rates and VAT deferral, there will now be a temporary ban on landlords forfeiting a lease where the tenant has failed to make payments that are due. This will cover rent, service charge and, it seems, insurance contributions. The ban will be in effect until 30 June 2020. Note that the money due must still be paid, and the landlord will regain the right to forfeit once the ban is lifted. The aim is to create an immediate breathing space. Landlords will be pleased to hear that nothing they do while the ban is in place will be treated as waiving their right to forfeit at a later date.
Q5: Will insurance for loss of rent cover a few years?
Again, probably not, because it is usually triggered by damage to the property. Even tenants’ own business interruption insurance is usually linked to the business being adversely affected by damage to trading premises, although it is worth getting your solicitor to look carefully at your policy wording.
Q6: How will turnover rent be affected?
Clearly, most tenants’ turnover will reduce significantly in the current situation. Most leases with rents based on turnover will provide for a minimum base rent to be payable as well as the turnover element. That will probably continue to be payable for the reasons explained above, but the turnover element will be greatly reduced.
Q7: If a tenant closes premises despite a ‘keep open’ clause in the lease, what can the landlord do?
The landlord’s remedies in this situation will be quite limited. UK courts are very reluctant to grant injunctions forcing tenants to continue trading in normal circumstances and it is inconceivable that they would do so at present. That leaves the landlord with a possible claim for damages for breach of the lease, but it will be very difficult for the landlord to show measurable loss actually caused by the specific tenant closing rather than the wider circumstances.
Q8: If the landlord decides to close premises, will it be liable to tenants?
Under normal circumstances, the tenant would have a claim against the landlord for derogation from grant (in other words, denying the tenant its right to occupy under the lease). At present, it will be extremely difficult for tenants to show that they have suffered loss as a result of the landlord’s action, especially where the Government has ordered premises to close. The landlord may also have the right to close common parts where force majeure applies.
Q9: Does the landlord have health and safety obligations in relation to COVID-19 for property let to tenants?
A landlord’s general health and safety obligations will depend on whether it has control of any part of the property. A property fully occupied by a single tenant will primarily be that tenant’s responsibility. For multi-let properties, the landlord will usually be responsible for the common parts. The exact duties in relation to COVID-19 are unclear, because it seems to spread between humans not through parts of the building (such as a water system). Best practice for landlords is to follow current advice from Public Health England.
Q10: Can the landlord recover the cost of extra cleaning through the service charge?
This depends on how the service charge is drafted but most leases will cover the cost of cleaning and contain a general clause covering any unexpected expenses, to the extent that they are reasonable.
For further information, please contact Ian Cowan in the commercial property team on 0191 567 0465 or email: firstname.lastname@example.org
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published on 1 April 2020.