Commercial Lease and COVID-19 –what is my position as a Commercial Landlord?
In the midst of COVID-19 many of our clients have concerns about their tenants keeping their business afloat and as a result, meeting their obligations under the terms of their lease.
Many landlords are seeking guidance on what they can do and what assistance the Government has put in place in the last few days to support tenants facing issues with their businesses.
Below we have put together a note on the tricky questions that landlords have raised in this uncertain time along with an overview of what mechanisms the Government has put in place to assist businesses.
As with any matter, the first step we always suggest to our clients is to check their lease. Your lease will dictate the landlords and tenants’ obligations which will include the termination and/or exiting process, requirements to stay open and requirements to pay rent.
If you require further legal advice in relation to COVID-19, we are currently offering a free 30 mins consultation to answer any questions you may have. Please get in touch using the Contact Us page on our website
- Termination – Does COVID-19 bring the lease to an end?
It is very highly unlikely that a tenant will be able to terminate their lease as a result of COVID-19.
A tenant’s two most likely arguments will be frustration or force majeure.
The lease would have to contain a force majeure clause for it to be relied upon, which is not typical of a standard lease, and the clause would have to contain a specific provision that is applicable to these particular circumstances.
Frustration allows a contract to be discharged in the circumstances whereby an intervening and unforeseen event occurs that renders the performance of the contract impossible. The purpose is to avoid injustice to a party where there is a significant change in circumstance that is at the fault of neither party. The test for frustration and the threshold is high. What is important to consider is whether COVID-19 makes the performance of a contract impossible or more difficult. If it is simply more difficult, the contract will not be frustrated.
If a tenant is temporarily unable to open their shop or occupy their premises, it is unlikely that they will be able to argue successfully that the lease has been frustrated.
In light of the above – unless the lease contains a break clause or lease expiry, the tenant will not be able to terminate the lease.
- Rent – what if the tenant stops paying?
Refusing to pay rent will normally constitute a breach of the lease and enable the landlord to commence forfeiture proceedings and wind up the company for the debt due. However, many landlords are querying if COVID-19 will permit the tenant to withhold rent and, whether COVID-19 falls under the lease insurance provisions.
If a tenant is unable to get out of its obligations under the lease as a result of COVID-19, can they then withhold rent if the premises have to close?
The answer is likely to be no. We are awaiting further guidance from the Government and it is not clear yet how the Court will react to landlords commencing forfeiture as a result of a tenant failing to pay due to COVID-19 related losses.
Rent abatement clauses within leases usually cover the premises being unfit for occupation, as a result of damage, for which the landlord is insured. It is highly unlikely that such a clause will be triggered as a result of the premises being unhabitable by COVID-19 as this is a reason not attributable to the premises themselves.
What we are expecting to see is tenants requesting rent concessions or rent-free periods in response to COVID-19 due to the impact it is having on their businesses. These requests will most likely be underlined by the impending and real threat of insolvency they may face if the landlord does not agree and they are unable to pay. It should be noted that if a tenant was to collapse, the landlord could be left as an unsecured creditor and it may make more commercial sense to consider the longer term impacts you may face when a tenant approaches you for support. The following are options for landlords to consider, if faced with a tenant struggling to pay rent:
- Reduce the rent for a short period of time – with the balance to be deferred to a later date.
- Short suspension “holiday” of rent payments – consider pausing the rent for 3 months, with the balance being added to the following 6 months once the time has lapsed.
- Reach an agreement with the tenant as to how they can pay rent. If they are paying quarterly, then considering monthly payments may help the tenant manage cash flow.
- “Keep Open” Clauses – does the tenant have a right to close?
Businesses have started to close temporarily during the COVID-19 outbreak, on their own volition.
This will obviously set off alarm bells for many landlords concerned about tenant’s ability to pay rent.
Many commercial leases will contain operating requirements or a “keep open” clause that requires tenants to remain open during normal business hours to protect the landlord’s income throughout the duration of the lease.
In normal circumstances, a landlord seeking to rely on such a clause would not be able to force a tenant to remain open, but they would be able to claim damages for loss as a result of the breach.
As it is not yet clear whether the Government will put any measures in place to require shops and businesses to close (as we have seen in neighbouring European countries) – if they do, then it may have an effect on the enforceability of these clauses.
- Insurance – does it cover COVID-19?
Many insurers will not cover viruses, such as COVID-19, unless they are expressly mentioned in the policy. Losses by an act of God may be an alternative, however, it will again depend on whether it is within the policy.
Businesses that have cover for both pandemics and government-ordered closure should be covered, as the government and insurance industry confirmed on 17 March 2020 that advice to avoid pubs, theatres etc is sufficient to make a claim as long as all other terms and conditions are met.
Policies may also include the following, which may assist tenants (and their ability to meet their obligations to their landlords):
- Business interruption Policy
- Crisis Management insurance
- General liability insurance
- Mitigation insurance
As Insurance policies differ significantly, businesses are encouraged to check the terms and conditions of their specific policy. Unfortunately, most businesses are unlikely to be covered, as standard business interruption insurance policies are dependent on damage to property and will exclude pandemics.
- Assistance for Tenants – what assistance are commercial tenants eligible to receive from the Government?
The Chancellor has set out a package of temporary measures to support businesses through the disruption caused by COVID-19. This includes the following:
- a Statutory Sick Pay relief package for small and medium sized enterprises (‘SME’s’).
- a 12-month business rates holiday for all retail, hospitality and leisure businesses in England. Properties that will benefit from the relief will be occupied hereditaments that are wholly or mainly being used as shops, restaurants, cafes, pubs, music venues and hotels (non-exhaustive list).
- small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief.
- Grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000.
- The Coronavirus Business Interruption Loan Scheme offering loans of up to £5 million for SMEs through the British Business Bank. The government will provide lenders with a guarantee of 80% on each loan (subject to a per-lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs. The government will not charge businesses or banks for this guarantee, and the Scheme will support loans of up to £5 million in value. Businesses can access the first 6 months of that finance interest free, as government will cover the first 6 months of interest payments.
- A new lending facility from the Bank of England to help support liquidity among larger firms, helping them bridge coronavirus disruption to their cash flows through loans. Under the new COVID-19 Corporate Financing Facility, the Bank of England will buy short term debt from larger companies. This will support companies if it has been affected by a short-term funding squeeze and allow them to finance their short-term liabilities.
- the HMRC Time To Pay Scheme.
If you have any questions – we are currently offering a 30-minute free consultation to assist clients, old and new, with any COVID-19 questions they may have. Please get in touch today.
