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Coronavirus and commercial leases: 10 key questions answered

08 Apr 2020

There is a lot on peoples' minds right now. Importantly people need to stay safe and keep well, respecting the guidance and directives. There is a need for understanding, compassion and intelligent actions.

Meanwhile, self-employed businesses like mine need to adapt and continue smart engagement. Based on a recent conversation, I’ve put together (in my own time and at no cost to anyone) what I’ve called ‘10 key questions answered’. It is aimed at businesses and enterprises. The caveats are that whilst I am an experienced property adviser, I am not a lawyer. And, as always, it comes down to the precise wording of each contractual agreement.

  1. Can a tenant (adversely affected by Coronavirus) terminate their lease?

    In a word, the answer is ‘no’. A tenant can’t just terminate at will. The exception might be a rolling break clause. The other point here is that leases do not typically include a *force majeure clause.

    *A Force Majeure clause (French for "superior force") is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.

    The purpose and effect of a force majeure clause is to define, as precisely as possible, the circumstances under which a contracting party is released from its contractual obligations.

    In future, I foresee leases referring to pandemics.

    Of course, there is scope for leases to be terminated in cases of ‘liquidation’ where an appointed Liquidator can terminate a lease using the mechanism of **Disclaimer.

    **If a company goes into liquidation, the liquidator can disclaim the whole of an insolvent tenant's liability under a lease. The disclaimer ends all the tenant's rights, interests and liabilities, effectively meaning that the tenant can get out of the lease early.

  2. Can a tenant withdraw from an exchanged Agreement for Lease (A4L)?

    It depends on the provisions and clauses in the A4L relating to termination and rescission. Again, we are talking about force majeure clauses. It is unlikely that the standard force majeure clause will apply in this case because up until now it is unlikely that a pandemic will have been specified. However, note that conditionality could apply. E.g. Landlord carrying out works by a ‘long stop date’ but not being able to do so because of current circumstances pertaining to the effects of Coronavirus, namely: the supply chain is interrupted; or the contractors are unable to come on site (see latest government guidelines); or that the contractors are on site but are now having to vacate site. These are circumstances where the tenant may be able to terminate the A4L but as always it comes down to the exact wording.

  3. Can a tenant withhold rent, or pay a reduced rent because of Coronavirus?

    The Government is introducing a wide range of measures to address the economic and social consequences of coronavirus including Landlords not being able to forfeit leases for a period of 3 months. However, this doesn't let the tenant off paying the rent. It will have to be paid, so the simple answer to the question is 'no'. Cashflow is a matter for each business or enterprise. There are suspension clauses, but they apply to damaged property vis-a-vis insured risks. One exception to the answer to this question is where the tenant is going down the ***CVA route.

    ***A Company Voluntary Arrangement (CVA) provides a way for companies in distress to pay off their debts over a fixed period of time and offers the opportunity to address issues surrounding management and operational systems that were not working.

    At this difficult time, Landlords are being encouraged to be sympathetic. However, a note of caution. Any ‘rent holiday’ should be documented formally. For Retail tenants, who pay turnover rents, their rent will fortuitously reflect the current circumstances. Paying monthly is also a key consideration.

  4. Does a tenant have to continue paying business rates, or does this become the responsibility of the Landlord?

    Under the terms of the lease the occupier is responsible. But bear in mind recent government initiatives to assist businesses including assistance (concessions) with business rates. Generally, it’s a matter between the tenant and Local Authority.

  5. Are tenants likely to be insured in circumstances like this?

    Possibly, in the guise of business interruption insurance, but it in most cases it is not covered.

  6. Whose responsibility is it to manage Coronavirus in premises that have been LET?

    In relation to a single let of a complete property, it is usually the tenant as per the lease, which typically requires the occupier to abide by all Acts of Parliament, Byelaws, Regulations, Directives etc. So, the Tenant. Businesses / enterprises are encouraged to follow guidance issued by Public Health Agencies in respective countries. But note that in multi-let spaces / buildings, there are common parts for which the Landlord is responsible.

  7. How are tenants with a 'keep open' covenant going to be affected?

    Typically, this applies to retail leases. For example, ****‘anchor tenants’ in shopping malls.

    ****Anchor tenant is a major department or chain store located at a shopping mall to give maximum exposure to smaller, satellite stores. ... An anchor tenant is often referred to as a magnet store, anchor store, draw tenant, key tenant, prime tenant, or a traffic generator.

    However, evidence suggests that they are not normally enforceable. A breach could give rise to a claim for damages, but this would require an explanation and justification for ‘loss’. In the current circumstances the courts are unlikely to look at such a situation favourably. Also, the tenant doesn’t have to comply if it is contrary to any statute or regulation given by an authority / authorities.

  8. What are some of the Landlords obligations in the current pandemic situation?

    Landlords remain responsible for ‘common parts’ and the other Landlord covenants specified in leases, including government guidelines / regulations. In accord with good estate management, their responsibilities will be covered by various clauses in the service charge provisions etc.

  9. Can the additional costs (from Coronavirus) be recovered under the service charge provisions from Tenants?

    Usually yes because provisions in service charges are very wide, including ‘sweep-up’ provisions. For example, Landlords should act in accord with good estate management. In the current circumstances, this may mean deep cleaning, providing sanitisers etc. These costs are recoverable under the Service Charge.

  10. Are there are any other potential risks to Landlords?

    Yes, there are a few. For example, in a Shopping Centre, the Landlord will have covenants to provide services. However, the current position (vis-à-vis Coronavirus) will present supply chain difficulties. It may not be possible to provide such services. Also, if a building is closed by the Landlord, it may give rise to the potential for a claim against the Landlord where the tenant cannot open its premises. The landlord could be responsible for *****Derogation from grant.

    ***** The rule that a party should not derogate from its grant embodies a general legal principle that, if A agrees to confer a benefit on B, then A should not do anything that substantially deprives B of the enjoyment of that benefit. Derogation from grant is commonly referred to in the context of landlord and tenant relationships. Where a landlord has taken steps, or granted rights to another party, which render the premises unfit or unsuitable for the purpose for which they were let, the landlord is said to have derogated from its grant (under the lease).

    This could lead to potential damages, but the key question then is who bears the loss? The reality right now is that Landlords have as many concerns as tenants, and Tenants have as many concerns as Landlords. A balance needs to be struck between who bears the ‘loss’. The objective must be for everyone to act reasonably and collaboratively. Resolve by negotiation, not litigation.

Written by Robert I Chapman, Director Dip. Est. Man. (Hons), M Sc (Regen), MRICS, Affiliate RTPI, FRSA. RC2

Please note, this content is not produced by the IoD and therefore does not necessarily represent the views or thoughts of the organisation.

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