COVID-19: Considerations for Landlords and Tenants of Commercial Premises

COVID-19: Considerations for Landlords and Tenants of Commercial Premises

23 June 2020 Katy Williams

The advent of the Coronavirus has caused an unprecedented impact on the operation of many businesses in the UK. As the situation develops on a daily basis both landlords and tenants are having to evolve to face the challenges of the effect of this now global pandemic.

The swiftness with which the situation has escalated will leave many wondering what to do next. At Neves, we are here to support you and have set out below points for both parties to consider when deciding how to proceed at this difficult time; bearing in mind that in the case of existing tenancies the options available to the parties will depend largely on the terms of their existing lease.

Alternative Use

There is no doubt that hospitality sector has been hit hard by forced closures of pubs, restaurants and cafes.  However, the government has passed legislation to relax planning laws to enable a temporary change of use for pubs (A4) and restaurants or cafes (A3) to be operated as hot food takeaways under permitted development rights for a period of 12 months only (starting from 24 March 2020 and ending on 23 March 2021). This is subject to notifying the relevant local authority of the change of use from the date of commencement and on the basis that the use will revert back to the original use at the end of the period. Landlords and tenants however need to bear in mind that any such change of use remains subject to restrictions under the lease terms and so such amendment may need to be documented by formal licence. In addition, there could be non-compete or planning restrictions affecting the premises which have to be taken into consideration.

Keep Open

Leases of retail premises in particular can contain keep open clauses which prevent a tenant from closing premises during normal trading hours because of the adverse impact that this can have on foot fall to the surrounding businesses. However, historically such covenants have proven difficult to enforce and the general opinion of the legal industry at present is that judges are likely to look unfavourably upon any landlord seeking to claim against a tenant for breach of such a covenant in the current climate. It would also be difficult to quantify any loss to the landlord, to assess the level of damages, given that any such closure is pursuant to government edict and other premises in the same area are likely to be similarly affected.

Landlords also need to consider their obligations to keep open a multi-let building in circumstances where the government has not expressly required that such premises be closed. Failure to do so, which prevents the tenant operating its lease, could constitute a breach of the landlord’s obligations to provide quiet enjoyment of the premises and be a derogation from the lease grant. The suspension of any services and access over common areas could arguably be justified given the current health risk. However, this will depend on the circumstances and the terms of the lease. Consideration should be given as to whether a service charge concession is available for services which are not being provided during any period of closure. Although this may need to be balanced against any additional costs to the landlord for putting in place protective, cleaning and screening measures to reduce the spread of the Coronavirus infection.

Compliance with Laws

There is covenant which is standard in most, if not all leases, requiring a tenant to comply with all laws, statutes and regulations affecting premises let to them and this will include observing the current government “lockdown” rules.  Not only does this have to considered in the context of the landlord’s ability to enforce a  keep open covenant as referred to above (which would clearly conflict) but this also imposes an obligation to observe the government requirements to close premises and facilitate staff working from home where required and/or possible. Tenants should also be mindful of the obligation to provide the landlord with a copy of any correspondence received from the government or a local authority or other statutory body regarding the premises and/or the operation of them at this time. 

Insurance

Landlords and tenants are encouraged to review their insurance policies. Whichever party is responsible for insuring the premises should pay particular attention to the terms of their policy with regard to leaving premises empty and should notify insurers immediately if the premises are left unattended. Any additional security requirements of the parties should also be considered.

When damage occurs to premises due to an insured risk (and in some cases a risk for which the landlord is unable to obtain insurance on reasonable commercial terms in the insurance market) then, depending on the lease terms, a right to a rent suspension may apply. However such suspension is unlikely to operate purely on the basis that premises have been closed.

It is possible that either party could have the benefit of insurance for business interruption or crisis management which may soften the blow caused by the impact of measures to stem the spread of Coronavirus. However, it should be noted that some insurers have already issued a statement that the current circumstances are not covered unless that policy specifically includes cover for compulsory closure by any notifiable infectious disease. You are advised to consult with your insurers for further information this respect.

Rent Payment

The standard terms of a lease will provide that a tenant is not allowed to withhold rent in any circumstances and this will apply even though the premises cannot be used (or are being used on a limited basis) due to temporary closure. There are however options available to landlords and tenants if they wish to maintain the tenancy where tenants are struggling to keep up with their rental payments due to the impact of the Coronavirus “lockdown”. These include changing the rent payment dates to monthly (where payment is usually quarterly) to alleviate cash flow issues, drawing on rent deposits and allowing a tenant a longer period to top up the deposit or giving a rent reduction until a later date when the rent will revert back to the existing level. Overall we would urge landlords and tenants to enter into a dialogue early on if it is envisaged that this could be an issue, as co-operation in the current market seems to be the most sensible solution. Any agreement between the parties should be properly documented.

Forfeiture

The withholding of rent will constitute a breach of lease terms which usually allows a landlord to forfeit the lease and take back possession of the premises. The definition of “rent” can be construed widely in a lease to include service charge and insurance rent. This right is subject to a tenant’s right to seek relief from forfeiture in the event of the arrears and any costs of the landlord for issuing forfeiture proceedings being paid. However, the Coronavirus Act 2020 came into effect on 25th March and has suspended any right of a landlord to take forfeiture proceedings against a business tenant for non-payment of rent between the periods 26th March to 30th June 2020. This suspension has since been extended to 30th September 2020. Although tenants should note that for the same period the landlord’s actions to indicate that the tenancy is continuing will not be deemed to be a waiver of the right of forfeiture after this period. Nor does the legislation write off the debt or prevent the landlord from taking possession of the tenant’s goods to levy distress or issuing insolvency or debt recover proceedings. The legislation also does not prevent forfeiture for any non-monetary reason and so a lease could still be open to forfeiture for both breach of covenant other than non-payment of rent(s) and on insolvency grounds. These provisions also do not extend to those operating under licensed office arrangements in a shared building where the occupier does not have exclusive possession of the area occupied. It should also be remembered that failure to pay rent on time could impact on any existing rent concessions that have been agreed between the parties.

Termination

A lease cannot be terminated early unless it contains a specific break right in favour of either party or the landlord and tenant between them agree to an earlier surrender of the lease documented by formal deed.

Force majeure is a legal principle which allows termination or suspension of a contract where it is incapable of being performed due to an event outside the parties’ control. However, it is extremely rare for a lease to contain a force majeure clause.

The law of frustration also allows contractual relationships in certain circumstances to be terminated on the occurrence of an event that renders it impossible for the agreed obligations to be fulfilled. However, the burden of proof to succeed in such a claim is high and given the temporary nature of the current circumstances is likely to be difficult to satisfy. Legal commentary would also suggest that there have been no recorded cases of a lease being frustrated.

Proceeding with a Lease of Premises

The current situation has likely caused unrest for those of you contemplating taking on business premises under a new lease, renewing an existing lease or who are in the process of negotiating and finalising lease terms. However, rather than abandoning your plans altogether, now may be the time to consider the structure of the transaction; bearing in mind that the government “lockdown” is temporary and there are still parties out there who are keen to proceed to finalise terms so that their business is ready to operate as soon as the government restrictions are lifted. As such, rather than moving straight to completing a lease, the parties may in addition decide to enter into an agreement for lease which on exchange will bind the parties into completing the lease on the occurrence of a certain trigger event or events i.e. when the “lockdown” is lifted.  Other options to consider are longer rent free periods at the beginning of the lease, staggered rent increases in the initial months of the lease term or more frequent or earlier break options during the course of the term of the lease.

We encourage you to take heart in the fact that this situation is temporary and we are in effect all “in it together”. As a starting point we would, whenever possible, urge the parties to open up lines of communication to navigate the way forward in these unusual and unprecedented times.

How we can help

Neves commercial property specialists are here to help you with questions which you may have about your business premises. Call us on 0330 0945 500 email info@nevesllp.co.uk or complete our Online Contact Form and we will get back to you.

The content of this article is a summary of the laws and regulations in force at the present time (23rd June 2020). It is not, nor is it intended to be exhaustive, nor does it contain advice. Specialist advice should be sought in relation to any queries.