COVID-19 is changing the face of the legal workplace. Lawyers and their clients are going to have to adapt rapidly. What does this mean for commercial landlords and tenants?
All the advice and guidance we have seen so far relates to the residential conveyancing sector. Therefore, we’ve put together some practical advice for anyone starting to feel the pinch and worrying about the future.
Remember there’s a difference between the strict interpretation of the law and the advice we’re giving that we hope will help both commercial landlords and tenants find their way through this uncharted territory.
Advice for landlords
- How does the Moratorium on forfeiture claims affect me?
- Do I have to offer my tenant a rent concession?
- Can I say the obligations in the lease are suspended due to force majeure?
- Is the Lease Frustrated?
- Do I have to keep my building open for tenants?
- Can I enforce a keep open covenant?
- Who will pay for the extra cleaning costs at my building?
Advice for tenants:
- How does the Moratorium on forfeiture claims affect me?
- Do I have to continue to pay rent if my building is closed?
- Can I temporarily stop paying rent under the rent suspension clause?
- Will my landlord enforce the keep open covenant in my lease?
- Can I choose to close my premises as tenant?
- Will I remain liable to pay for the provision of services at my premises?
- How else might the lease come to an end?
- What about service of notices if there is a problem with the postal services?
Advice for landlords
How does the Moratorium on forfeiture claims affect me?
We've provided a detailed FAQ on this further to the government's announcement on 25th March that the Moratorium on forfeiture claims extend to commercial property for 3 months. Click here to read more.
Do I have to offer my tenant a rent concession?
No, it is entirely within your discretion whether you agree to your tenant paying reduced rent, having a rent holiday or paying monthly. Generally, the tenant has to continue to pay rent under the lease and rent is not suspended due to Covid-19. However you may consider that action you take now might help your tenant to survive this economic downturn meaning you are more likely to receive rent in the future.
If you do decide you are willing to offer a rent concession, then you should document any such agreement in a side letter which sets out the changes and for how long it will last as a temporary arrangement. There is no problem with doing this and it will not create a permanent change to the lease terms.
Your tenant may ask for a deed of variation which is a permanent change to the lease. It is possible that permanent changes to the terms of the letting become necessary in the future as we see the longer term effects of this situation but, for the short term, our advice is to wait before taking any permanent steps.
Can I say the obligations in the lease are suspended due to force majeure?
No. Most leases do not contain provisions allowing suspension or termination due to ‘force majeure’ circumstances, i.e. the happening of an event outside the control of the parties such as a natural disaster. Generally, leases will continue and the parties must continue to carry out the obligations contained in them. Please note insurers are bound to try to use Force Majeure to avoid claims, by contrast.
Is the Lease Frustrated?
It is unlikely that COVID-19 will frustrate a lease unless the Courts determine otherwise. In Canary Wharf (BP4) T1 Limited & Others v. European Medicines Agency [2019] EWHC 921, the High Court held last year, that Brexit didn’t frustrate a lease. Currently, there is no reported case of the law of frustration being successfully argued in relation to a lease. There was emphasis on the fact that the property could be assigned therefore, since most leases contain alienation provisions, it is difficult to see how a different decision could be reached on COVID-19. This point has yet to be tested.
Do I have to keep my building open for tenants?
So far the Government’s focus has been on telling businesses to close although still the advice is to self-impose rather than this being enforced.
If there has been a case of COVID-19 in the building, you should be able to restrict access to the common parts as you will be acting reasonably. The majority of commercial leases permit a landlord to restrict access to common parts of its building in an emergency.
In these circumstances, the building may have to close as tenants would not be able to access the premises. Landlords are generally allowed to suspend provision of services if the building has to shut in an emergency and the service charge would be reduced accordingly.
Can I enforce a keep open covenant?
Keep open covenants are common in shop leases but not otherwise. If a tenant decides to shut its premises then it will be in breach of any keep open covenant. However, keep open covenants are difficult to enforce and the usual remedy of damages will be difficult to quantify unless the tenant is paying a turnover rent, where the landlord can establish the loss of turnover for the days on which the tenant is closed.
Case law states that forfeiture, or an injunction preventing closure, are not suitable remedies for breach of a keep open covenant. Landlords may not able to enforce such a covenant if the tenant closes its business but continues to pay rent.
Now that the Government has forced closure of premises, the covenant for tenants to comply with statutory regulations will be likely to take precedence over a keep open covenant.
Who will pay for the extra cleaning costs at my building?
A tenant is likely to be required to pay for extra cleaning costs through the service charge. Most commercial leases have a general sweeper clause that allows a landlord to recover all reasonable costs through the service charge and this is likely to cover an extra cleaning costs.
Advice for tenants
How does the Moratorium on forfeiture claims affect me?
We've provided a detailed FAQ on this further to the government's announcement on 25th March that the Moratorium on forfeiture claims extend to commercial property for 3 months. Click here to read more.
Do I have to continue to pay rent if my building is closed?
Yes, generally you will need to carry on paying rent even if your building shuts. If the building closes due to an outbreak of COVID-19, then your landlord will be acting reasonably if it shuts the common parts which prevents access to your premises.
Now that the government passes regulations stating that buildings have to shut, you will also still have to continue paying rent. You should ask your landlord if you can have a rent holiday, pay reduced rent or pay monthly. The landlord does not have to agree to this, but it is worth starting a dialogue early as landlords may be more likely to agree to a rent concessions in the current climate.
If your landlord does agree a rent concession, you must make sure this is documented in a deed of variation or side letter. Whether this needs to be a permanent arrangement depends on how long this situation goes on for. Our advice at the moment is to agree to a side letter. If you need to renegotiate the lease, that can take place over the coming weeks or months.
Can I temporarily stop paying rent under the rent suspension clause?
No, most leases provide for rent to be suspended if the property is damaged by an insured risk (and sometimes by an uninsured risk), but are unlikely to include wording suspending the rent in the eventuality that they are not permitted to open due to the government requiring premises to close.
You should check your business interruption insurance to see whether you might be covered for any rent you have to pay whilst the premises are closed. However, it may be that some insurers determine that closure due to COVID-19 is a ‘force majeure’ event and therefore will not cover this loss.
Again you should contact your landlord and ask for a rent holiday, reduced rent or to pay monthly. It is up to your landlord to decide whether or not to agree to this but it is definitely worth starting a dialogue.
Will my landlord enforce the keep open covenant in my lease?
You need to check to see if there is obligation on you to keep your premises open during normal trading hours. Some landlords may agree carve outs to this keep open provision whereby the tenant is not on the hook to open in certain circumstances (for example where obliged to close due to government legislation). You might want to ask your landlord to agree to add this in a side letter or deed of variation.
Recent case law means that landlords are unlikely to be able to force a tenant to open even where the lease contains a keep open clause. However, a landlord does still have the ability to claim damages for breach of contract. If you are renegotiating rent concession with a landlord it may be prudent to also agree that any keep open provision (and related penalty) will not apply during any forced closure due to COVID-19.
Can I choose to close my premises as tenant?
Most leases do not oblige tenants to remain in physical occupation and trade from their premises. In the absence of a keep-open clause, you don’t have to stay open for business as long as you carry on paying the rent.
As mentioned above, you will have to stay open if you have a keep open clause in your lease. However, if the current regulations are likely to take precedence over a keep open clause.
Remember to check the insurance provisions and contact the insurers if you are closing your premises. You must follow any requirements they have so the insurance remains valid.
Will I remain liable to pay for the provision of services at my premises?
Yes, tenants must continue to pay service charge and landlords will remain liable to provide services to properties where the leases include service charge provisions although these are likely to be limited as premises are closed and you only have to pay for what is actually provided.
If a landlord needs to provide more intensive services such as deep cleaning or extra soap, the additional costs are likely to be recoverable under the service charge provisions as reasonable costs.
How else might the lease come to an end?
If there is a break provision in the lease it might be possible for a tenant to exercise the right to break. Remember that many break clauses also require the tenant to have paid the rent up to and including the break date. If you are thinking of exercising a break clause, speak to your lawyer. Remember once a notice has been served it can’t be unserved!
What about service of notices if there is a problem with the postal services?
It is important to check service provisions in leases and under statute very carefully to establish whether alternative methods of service can be used such as by hand.
In addition, it is vital that landlords and tenants inform their legal advisers at the earliest opportunity as to likely requirements to serve notices over the next few months so that preparation and planning can be carried out in case there was to be a disruption to the postal service.
Conclusion
For most properties, the exact solution will be unclear and my advice - as always - is to maintain a good dialogue between landlord and tenant. If one or other party decides to play hard ball, it is unlikely to end well for anyone. A bit of compromise and flexibility is more likely to end with a good result. Tenants, ask only for what you need. Landlords be prepared to be flexible. Remember stopping the flow of money in the economy will only have a negative effect as we all have to tighten our belts.
If you have any other questions or would like to speak to a member of our Commercial Property team, call us now on 01962 844333 or email contact@duttongregory.co.uk.
