March 20, 2020
As the spread of Covid-19 continues, significant pressure is continuing to mount on commercial tenants of UK property. The threat of increased business disruption, reduced cashflow and compulsory lock-down will no doubt be resulting in a lot of questions about what can be done to ease the burden.
This note is not intended as advice, but as a headline guide to the common questions we are being asked, in this specific area, and which may be relevant to you.
Can I terminate my lease early?
Unless you have the benefit of an upcoming break right, then the answer to this question is likely ‘no’.
From a pure contract point of view we can consider whether the lease has been “frustrated”. This is where some supervening event occurs that makes performance of the contract radically different from what the parties had contemplated when they entered into it. However, this has never before been applied by the UK courts in the case of a lease and it is very unlikely that a lease would be seen to be frustrated as a result of a pandemic.
We can otherwise consider whether there is a force majeure clause permitting termination. Again, this is somewhat unlikely as it is uncommon to see such clauses in modern commercial leases.
Will my rent be suspended?
Here we would look to the insurance provisions in the lease and whether or not ‘pandemic’ or ‘virus’ falls under the definition of the insured risks. That said, in the unlikely event that it is covered under the definition, these clauses are generally triggered by physical loss or damage to the property and therefore wouldn’t necessarily apply here.
Landlords are likely to see the current outbreak as being a tenant’s business risk and a matter outside the lease.
Can I withhold my rent?
This is a commercial call and one that we wouldn’t readily recommend. It is a material breach and the landlord would be entitled to terminate the lease. They can also claim for recovery of debt by way of court proceedings, commence a commercial rent arrears recovery (seizing tenant goods at the property to the value of the rents), or issue a petition to wind up the tenant company.
However, from a practical perspective, it is hard to say whether or not landlords are likely to want to forfeit leases in the current climate. With no market to re-let, they’ll instead be left with an empty space and no onward certainty. There is no guarantee though and we suspect this will very much depend on the specific landlord, property and lease. It would have to be considered on a case by case basis.
What happens if my Landlord closes the building, preventing access or reducing common parts?
This will depend on the landlord’s obligations contained in your lease and any potential claim you may have as a result of that. Needless to say, if closure is as a result of government orders, you as tenant should also be following these orders and will not be directly impacted.
Certainly though, if services are unavailable or common parts inaccessible, your service charge payments should be either suspended or reduced.
So, what can I do to help ease the burden?
Negotiate with the landlord
Transparent communication seems the most sensible solution at this point. There is no harm in having an up-front conversation with the landlord to assess whether a collaborative approach can be agreed to help cushion the impact of the ongoing pandemic. For example:
- Agreeing a temporary reduced rent;
- Pausing rents for 6 months and spreading the delayed rents over the next 6 months; or
- Paying rents monthly rather than quarterly to ease cashflow.
These are unprecedented and uncertain times and while each landlord will be different, it seems commercial to consider that some rent is better than a dispute and possibly no rent. Even better is to have a tenant who is still in occupation, relatively unscathed, by the time this all blows over.
We recommend you check your insurance policies to assess whether losses due to viruses are covered, although cover for this is unlikely. We would suggest checking policies such as General Liability, Business Interruption, Crisis Management, and Mitigation insurance.
Things to bear in mind:
Compliance with statutes
Thinking ahead to any potential lock-down, it is worth bearing in mind that most leases will contain an obligation for tenants to comply with all statutes, notices, and/or orders made by competent authorities. If any direction is issued by the government, such as asking staff to work at home or closing offices, then failure to comply would result in breach so this is something to be aware of.
If premises do need to be closed, it is also worth noting that most leases will contain an obligation for tenants not to leave the premises unoccupied for more than 21 days without notice to the landlord. If they are left unoccupied then suitable security arrangements should be put in place. This may be tricky depending on the state of affairs at the relevant time so it should be considered now in preparation.
Remember, each lease will be different and so before taking any action, a tenant should consider seeking formal professional advice.
We realise that the next few months are going to be extremely challenging for our clients and we will endeavour to update you on any important developments as and when further guidance is issued. In the meantime, please rest assured that we are here for you at this time and will respond to any queries you may have as quickly as we possibly can.