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The Impact of COVID-19 on Commercial Property Leases

Just when you thought that Brexit was pushed onto the furthest back burner, due to the current pandemic we sadly need to reference it again when considering the legal principals which may apply to commercial properties effected by Coronavirus (COVID-19).

In a recent article, we considered whether COVID-19 may bring the parties’ obligations under a commercial agreement to an end by frustration. I.e. is it impossible for the contract to continue to be performed and could the parties have known about the issue before the start of the contract? In theory, a commercial property lease can be frustrated as well. The issue has been considered by the Court in detail recently.

 

Frustrated Commercial Property Leases

Back in 2011, no one could have foreseen that the UK would leave the EU within 10 years.

Certainly, the European Medicines Agency (EMA) didn’t think it would happen when they signed up to take on a new 25-year lease (without breaks) of premises in Canary Wharf.

The EMA tried to argue several points. Not least the fact that by (EU) law it was required to relocate its headquarters to a member state. Keeping their headquarters in the UK would break the law.

The court, however, was unconvinced. The key factor in the decision against the lease being frustrated was the fact that the tenant was allowed to assign the lease so the parties had considered what might happen in the event the tenant needed to get out.

 

The Impact of COVID-19

Whilst the impact of COVID-19 is likely to be a huge challenge for all aspects of society we simply cannot see an argument on frustration ever being successful in the commercial lease context.

This is particularly the case as the situation will hopefully be short term and for those tenants who really have to get out, alienation provisions (allowing assignment or subletting) are fairly common.

So what other issues should you consider?

 

Rent Suspension

Commercial Property Leases often state that where a property is damaged, the rent will not be payable until the damage is remedied.

The issue with COVID-19 is we are talking about a virus as opposed to physical damage to a building. It seems that properties can be effectively deep cleaned, even if they have been contaminated.

Generally, rent suspension provisions are linked to insurance with the landlord (or the tenant if the tenant insures) agreeing to use the insurance monies to reinstate the property where it has suffered physical damage which is unlikely to arise under the COVID-19 scenario.

 

Cleaning Costs

It would be unusual for anyone other than the tenant to keep the interior of premises clean apart from communal areas perhaps in certain commercial buildings.

In that situation, the landlord/management company will probably have to initially cover the cost of any increased cleaning regimes.

However, these additional cleaning costs are likely to be capable of being passed on to tenants through the usual service charge provisions in the lease.

 

Insurance

Buildings insurance is unlikely to cover any issues relating to COVID- 19. That is unless there is some sort of damage caused by decontamination.

Both parties may wish to check their other insurance cover (i.e. business policies) to see whether they have any business interruption cover. It would be usual for there to be specific provisions relating to infectious diseases but worth checking anyway!

The issue many commercial property tenants were finding was that most insurance policies require the forced closure of a business.

Prior to announcements over the last few days, most closures were either businesses who could not afford to stay open due to lost custom or those taking reasonable steps to protect the health and welfare of staff and customers. Now that the government has insisted on closures of certain premises, those insurance policies may well now pay out.

 

Force Majeure

Otherwise known as an “act of god”, some policies will pay out if the business is effected by an act of god which forces a closure. The terms of any such policy should be considered carefully, particularly now that the government has insisted that certain premises must close.

 

Shopping Centres and Common Parts

If a landlord chooses to close the common parts resulting in the public being unable to access a tenant’s premises (even if they wanted to) there may be a claim against the landlord for interference with quiet enjoyment rights.

If you’re a commercial property tenant, you should check your lease carefully to see if your landlord is permitted to take such an action. There may be carve-outs in emergency situations.
If the government forces such closures the situation will be different.

Both parties should consider the lease provisions carefully and what they will mean in terms of payments and continuing obligations.

 

Keep Open/Turnover Rent Provisions

In some retail property leases, particularly those for properties in shopping centres, the landlords will require premises to stay open for a certain minimum number of hours. Likewise, some rents will be calculated based in whole or in part on the turnover of the business.

Closing premises due to government advice may arguably result in a breach by the tenant and the landlord’s remedy will be damages in these circumstances. We consider in the COVID-19 scenario that any landlord would be unlikely to get much sympathy from the court for bringing a claim where the tenant was simply protecting the health and wellbeing of staff and the general public in line with government policy. The landlord’s loss will also be hard to prove in circumstances where footfall is down in any event.

If the government requires other premises to close as it has with pubs and other leisure facilities, most leases will include a requirement for the tenant to comply with statute. It is considered that those provisions (i.e. following government instructions) would trump provisions in place to protect the landlord’s commercial interests.

On that note tenant’s should be aware of their lease terms and keep an eye on any changes in legislation as non-compliance with any new laws (even temporary ones) may put the tenant in breach of their lease obligations.

 

Practical steps to take

  • Check your commercial property lease as soon as possible so you know what obligation you must comply with. This applies if you are a Landlord or Tenant.
  • Take advice if you are unsure – if you are a tenant don’t just assume you can stop payment. Likewise, landlords shouldn’t just expect tenant’s payments (rent and other payments set out in the Lease) have to continue.
  • Check your insurance – if any claims can be made resulting from the pandemic then bear those in mind.
  • Keep an eye on the government’s offer to support businesses through the COVID-19 crisis – is there any funding available or preferential rate loans? Can you apply for rate relief?
  • Open a dialogue. We find all too often tenants who face money issues just stop all payments without a word to their Landlord or worst still, make promises to pay which aren’t met. A landlord left in the dark will often react to the fullest extent permitted by law and take steps which may not have been necessary if the parties had just spoken. Particularly in troubled economic times, landlords will often be prepared to consider Interim revised payment terms with tenants who are struggling financially, in respect of rent and potentially service charges
  • We are all in this together and need to get through it. Some element of give and take and renegotiation may need to take place depending on how the situation develops.
  • Finally, if any agreements are reached between the parties, you should make sure they are properly documented so that everyone knows where they stand and that there are no unexpected consequences of interim agreements in a time of unusual social and health concerns.

 

For more information or advice on any commercial property dispute, please contact Daniel Harley on 0115 9 100 295 or click here to send an email.

 

For advice on entering a commercial property lease, please contact a member of our commercial property team directly or click here to send an email.

Posted on March 26, 2020

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