The fast spread of Coronavirus (COVID-19), together with the restrictions imposed by the Government to control it, are having a significant impact on many businesses – not least, those in the retail, leisure and hospitality sectors.
Axiom Stone Solicitors has set out a brief response to some of the most frequently-asked questions raised by our clients during this current unprecedented period. We hope that these provide some practical guidance to commercial tenants and landlords finding themselves in similar circumstances.
Can a business remain open?
Under the Government’s emergency procedures, no food or drink can be served for consumption on premises – such as, restaurants, cafes, bars, public houses, cinemas, theatres and many other public places. A full list can be found on the following link:
In addition, most retail and leisure venues, as well as community spaces, have been ordered to close. Whilst many leases, especially those relating to premises within shopping centres, require the premises to remain open, tenants are usually required by their lease to comply with all laws and regulations in relation to the property. In such circumstances, compliance with the present emergency laws could override a tenant’s obligation to remain open. This implies that, if a tenant fails to comply with the Government’s current guidance and any COVID-19-related legislation, they would be in breach of their covenants under the lease.
It is debatable how the court would respond to any dispute as to the precedence of the “compliance with statute” clause over the “keep open” clause. However, given the current health crisis, it is expected that the court would not enforce payment of any penalty on tenants for breach of a “keep open” clause when such a breach arises from the tenant’s duty to comply with the law. The same principle would apply to the duty of a tenant as an employer to take all reasonable steps to ensure the health, safety and wellbeing of their staff.
Will the building insurance cover the rent during closure of the premises?
Tenants and landlords should check their leases carefully knowing that every lease is different. It is important to know precisely what terms have been agreed between the parties at the outset and what risks are required to be insured under the lease. The terms of the insurance policy will also need to be reviewed to find out if the policy cover extends to the risk of pandemics. If it does, and provided that the tenant is entitled to a rent suspension due to the occurrence of an insured risk, the landlord or tenant could then claim rent from the buildings insurers.
If the obligation to insure the building/property falls to the landlord, most leases entitle the tenant to receive a copy of the policy to review its terms. If a tenant does not have a copy, he or she can request one from the landlord.
Generally speaking, in most commercial leases concluded before the spread of COVD-19, cover for a pandemic has not been regarded as a standard cover under the definition of an “insured risk”. In consequence, other business-related insurance policies – such as, Business Interruption Policy, Crises Management Insurance and General Liability Insurance – if already procured, will need to be checked to confirm whether losses due to a pandemic or other health concerns are covered.
Due to the novelty of this pandemic it is unlikely that cover for such risk has been previously anticipated within the terms of pre-pandemic insurance policies. As such, most commercial tenants and landlords may well find that their policies are inadequate for the losses incurred during the pandemic period.
Can a lease be terminated early?
Some leases offer an option to terminate a lease early on a specific date subject to compliance with a few conditions. This is often referred to as the “Break” or “Early Termination” clause. Once again, each lease needs to be reviewed to verify if it allows for an early termination.
If the lease doesn’t provide an option to break, or in the event of a fixed break date if the relevant date has already been missed, then the only option will be to negotiate with the landlord an early termination of the lease by surrendering it. Once a lease is surrendered, the tenant’s interest will be transferred back to the landlord and both parties will accept that the lease is extinguished – usually in return for a surrender premium paid by the tenant to the landlord.
Terms for a surrender can only be reached by agreement with the landlord. In the current COVID-19 climate, landlords are, in our view, unlikely to agree to a surrender of a lease. In fact, we are seeing more and more tenants looking to seek rent-free periods or rent concessions from their landlords during the period of lockdown.
Is a tenant entitled to withhold rent payments or to ask for a reduction in rent due to the restrictions imposed on use of business premises?
Most commercial leases will only allow suspension of rent if the property is damaged or destroyed by an insured risk that makes it unfit for occupation or use. Otherwise, withholding rent will usually permit the landlord to re-enter the premises without notice in order to take possession of the property and to end the lease. This is legally known as forfeiture of the lease.
The Coronavirus Act 2020 provides a moratorium – until 30 June 2020, unless extended – in respect of forfeiture for non-payment of rent under relevant business tenancies. However, it does not prevent landlords from taking alternative courses of action against the tenants. Landlords can still make use of other debt recovery proceedings such as Commercial Rent Arrears Recovery (CRAR), issuing statutory demands or winding-up petitions for rental or other payments due under leases that might be detrimental to a business in the current circumstances.
Accordingly, both landlords and tenant are encouraged to reach a voluntary arrangement over rental payments and the reduction of rent. The point is that tenants are not entitled to withhold rental payments in the absence of a specific provision in the lease that would entitle them to do so. Tenants should also be reminded that landlords are not legally obliged to act in good faith by granting a reduction in rent because of the lockdown imposed by the spread of COVID-19.
We strongly advise both landlords and tenants to review their lease terms before making any decision in respect of their obligations.
Will a landlord still be required to provide services during lockdown period?
Yet again, the starting point from the landlord’s perspective is to review the terms of the lease and to see if there are any limitations or exclusions in place with regard to the landlord’s services under the lease. For example, the obligation to provide services may cease in the face of certain events beyond landlord’s control. For instance, this may well be relevant for those landlords unable to provide services through the unavailability of materials and labour.
In addition, provisions in relation to services should take into account the current movement restrictions and Government advice on social distancing. If a landlord closes certain premises in response to official advice, it will inevitably have an impact on service charges and may expose the landlord to other potential claims from their tenants. Overall, an assessment will need to be made on a case-by-case basis, in line with the terms of the lease, before finalising a response to the question of a landlord’s obligation on services
In the weeks and months ahead, the Government’s response to the pandemic is expected to continuously evolve in order to control the health crisis. Landlords and tenants are, therefore, strongly advised to be prepared by keeping abreast of Government announcements and ongoing developments in regulations and legislations related to the pandemic.
This article does not constitute legal advice and it is intended as general guidance only. For further advice on your commercial lease please contact Idnan Liaqat and John Oliver-Belasis from our Commercial Property Department.