April 8, 2020

As the spread of Covid-19 continues, many commercial tenants of UK property are looking to terminate their leases and licences early. For others, agreed periods of occupation are coming to an end during the lockdown. In such cases, how can occupiers make good on their exit obligations to remove their alterations and carry out repair works? If they simply cannot, what are the consequences?

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.

How might my lease end?

There are four main ways to exit a lease:

• Termination– usually due to expiry of the period of occupation or earlier breach.
• Surrender– where this is agreed between the parties to a contract as a commercial matter.
• Break– where a lease contains such a right, which will usually be solely in favour of the tenant.
• Force Majeure– if the lease allows for it, allowing a contract to be suspended or terminated as a result of material, unforeseeable events.

What are my exit obligations?

This will vary between contracts, but occupiers that have conducted alterations are very likely to be required to remove the same when their lease ends. There will also likely be a general ‘repairing’ covenant and an obligation to make sure that all sub-occupiers have left, and that “vacant possession” of the property is provided.

What should I do if I have to exit during the lockdown?

The options are:

• Comply with your exit obligations– by finding a way to mobilise for exit, even in the current climate. Many removal companies and fit out contractors are still operating. Whilst fees for such work don’t seem to be increasing, we are seeing more complexity in hire contracts, placing more of an onus on the tenant employer to ensure suitable insurance and increased liability for injury or death.
• Negotiate with the landlord– and agree a compromise position. In the current climate, with the absence of third party interest, landlords are more likely to be willing to consider sensible proposals, such as a short form “holdover” licence with an assurance to exit as soon as possible. An exit premium to otherwise leave the property as found could be agreed. If there are valuable tenant items on site, a reverse premium could perhaps be negotiated, or the landlord could holdover such items on the tenant’s behalf.
• Breach your contract– by accepting that exit obligations can’t be complied with and (if the landlord won’t negotiate) simply letting them sue. This is a commercial call and one that we wouldn’t readily recommend. In the current market, landlords will surely be motivated to pursue such breaches.
• Rely on force majeure– if there is such a right in the contract, seeking to suspend obligations. But can an occupier argue that force majeure endures beyond the expiry of the lease and suspends all exit provisions, until the force majeure event has passed? Our view is that this argument could be run, in certain circumstances, but that will depend on the specific wording of the lease and will need to be carefully considered on a case by case basis.

Other considerations?

• Can the landlord remove a tenant’s goods? It should be kept in mind that if a tenant runs the risk of being sued for failure to comply with exit obligations, or attempts to rely on force majeure provisions, then the landlord might try to remove the tenant’s items from the property themselves (which in most cases will likely be within their power). This is a factor that needs to be take into account when considering overall strategy.
• What about break clauses? It should also be kept in mind that if a tenant does exercise a break right under their lease, there will usually be strict conditions that need to be satisfied for the break to be effective. This will usually amount to a requirement to pay rent and to exit the property on the break date. These “break conditions” are very likely to impact a tenant’s ability to negotiate reduced rents/fees during the lockdown, and the overall position will need to be very carefully considered.

Remember, each lease will be different and so before taking any action, a tenant should consider seeking formal professional advice.