Lease issues in unprecedented times

On 11 March 2020 the World Health Organisation declared Covid-19 a pandemic and countries all around the world have been taking various measures to try and mitigate the spread of the disease with almost daily changes to the way we lead our lives in a way no one could have imagined only a few weeks ago.

Many types of business have found their trade totally decimated from restaurants to retailers leading to a whole raft of issues never previously encountered from real estate, employees, contracts and to regulatory/health and safety.

Restaurants and pubs were ordered to close their doors on 20 March and non-essential shops were told to close on 23 March. 

Mostly these operators will have leases of their premises the terms of which will govern their legal responsibilities in relation to each particular property.

Some issues which we anticipate arising:

Shutting up Shop

Whole chains of non-essential retailers and restaurants are closing down temporarily whilst the crisis is ongoing whether for economic and/or health reasons.  Each lease will be different but consider:

  • Does the lease contain an obligation to “keep open”? Even if it does, there is settled case law to provide that failure to keep open will not allow a landlord to forfeit the lease.  Damages will be the appropriate remedy.  In any event, consider if a landlord would expose itself to liability by trying to force a tenant to stay open in these circumstances.  Also, most leases would contain an obligation on the tenant to comply with all laws and so as the government has ordered non-essential shops and all restaurants to close we would assume that this obligation would take precedence over a keep open requirement.
  • Do landlords have a duty to close their multi-occupied buildings? Leases may give them the option to do this and the wording of each lease should be checked if this is something the landlord wishes to do,but generally landlords will have no right to stop their tenants entering and occupying their premises due to the “quiet enjoyment” clauses in virtually all leases.
  • Check your lease to see if you are obliged to tell the landlord if you are vacating. There may be insurance implications and/or security issues to consider.
  • If a landlord decides to keep an estate/multi-occupied building open then it needs to consider what operational changes might be necessary such as:
    • Closing section of the estate/building to public access;
    • Keeping tenants/employees fully informed
    • Increased cleaning and sanitation in common parts
    • Reduction of services which may have been previously provided e.g. reception service and cleaning. Often leases will allow variation to services due to circumstances beyond a landlord’s control.

As part of these considerations, a landlord will need to think about whether the cost of such measures can (or should) be passed onto tenants/occupiers via a service charge. 

Can tenants stop or delay paying rent?

We are receiving many enquiries from landlord and tenant clients asking about this.  It seems to be common that tenants are asking  to move from quarterly to monthly rent payments and we would expect most landlords to have no difficulty with this.  Tenants with many properties are simply telling their landlords en bulk that they are doing this without further notice.  Other tenants are saying they will not pay at all.  That is obviously a more serious issue for landlords.  Ideally, parties will keep communication open and reach a pragmatic solution for both parties.  It is very unlikely that a lease will allow a tenant to suspend rent in the current circumstances.  Usually leases will allow rent suspension only when premises have been unusable due to damage or destruction by an insured risk.  We would not generally expect to see pandemics or diseases being listed as insured risks – but they might well be in future.  Sometimes, leases allow suspension if a property has become inaccessible but, again, this would usually have to be due to an insured risk.

Lease Termination

A right to terminate would usually only apply if a property has not been reinstated after damage by an insured risk.  For the reasons set out above, this is unlikely to apply in the case of COVID-19. 

Can the lease end by the doctrine of frustration?  This is an unexpected event which is beyond the control of either party and which renders it physically or commercially impossible to fulfil the lease or which transforms the obligation to perform into a radically different obligation to that originally envisaged.  However, there are no reported cases in England where a lease has been held to be frustrated and it is very difficult to prove that frustration has occurred and so it is probably unlikely that a tenant could claim that is lease had been frustrated.

Business Interruption Insurance

By now it has been well documented that in most cases this type of insurance will not assist either because it requires physical damage to have been the cause of the interruption or because it does not cover “unknown diseases”.  But each policy should be specifically checked just in case cover is available.

General Property Management

Landlords and tenants need to be careful not to miss any important dates, especially break dates.  The operation of rights to break is very strictly construed and clearly service of notices will be harder when a lot of buildings are shut.  Legal advice should be sought at the earliest opportunity if a break notice needs to be served in the next few months to ensure that this is properly managed.  Each lease needs to be checked as often there will be conditions which need to be met before a break can be legally operated e.g. giving up vacant possession.  It will be difficult to clear premises of all furniture, equipment etc at the moment and so taking legal advice and opening up communication with the other party is key. 

Rent review dates will usually be less problematical as generally they provide that time is not “of the essence” so that rent reviews can be activated in due course and backdated to the rent review date specified in the lease. 

Work Together

We recommend that parties try to work together to achieve mutually acceptable arrangements during this period with a view to sustaining long term viability. 

For more information on the article above please contact Annabel Holyoak or visit the Coronavirus/ COVID-19 area on our website.

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