Commercial Leases and COVID-19.
Readers will be all too aware of the recent measures introduced by the UK government to mitigate the spread of coronavirus:-
- closing non-essential shops and businesses
- requiring people to stay at home, save for very limited purposes
- stopping all gatherings of more than two people in public
Of particular relevance to this article is the coming into force of the Corona Virus Act 2020 and the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020. A number of legal and practical considerations are likely to arise for landlords and tenants. This article does not attempt to deal with the inevitable Health & Safety and/or Occupiers’ Liability issues but instead focuses on what are likely to be the immediate contractual concerns.
Breach of “Staying Open” Clauses
Many retail and leisure leases contain express obligations requiring the operator to remain open during specified days and hours. Such clauses have the potential to place the tenant in breach of covenant when they close. It is however equally typical for commercial leases to include an obligation on the part of a tenant to comply with statute. A tenant would be in clear breach of that provision if it failed to comply with its statutory obligation to “shut up shop”.
I consider that most courts in England and Wales would be likely to give precedence to the compliance-with-statute clause in the present environment. Indeed, it is well established in this jurisdiction that the courts will only enforce covenants to “stay-open” by specific performance in the most exceptional of cases.
Care may nevertheless have to be taken in relation to the voluntary closure of “essential” shops which are unaffected by the Regulations (Part 3, Schedule 2 exemptions). A landlord may be entitled to seek damages in such a scenario, particularly where any element of the rent is based on turnover. Losses may, however, prove difficult to establish.
Rent & Service Charges / Forfeiture
Leases typically do not provide for tenants to withhold rent outside of certain specific events; normally relating to property damage where the buildings insurance would be expected to respond. It is very rare to find “force majeure” clauses in commercial leases. The common law doctrine of “frustration” is also unlikely to apply in what is hoped to be a relatively temporary scenario. I am certainly unaware of any past case in this jurisdiction where frustration has been successfully deployed to terminate a lease, albeit the House of Lords declared it to be possible in National Carriers Ltd. v Panalpina (Northern) Ltd. (1982) 43 P. & C.R. 72.
The net effect, at least for the present time, is that the obligation to pay rent will stay with the tenant.
This reality is somewhat tempered by s 82 of the Coronavirus Act 2020, which came into force on the 25.03.20. The Act has suspended the landlord’s right to take forfeiture action or enforce possession against business tenancies (as defined by the Landlord & Tenant Act 1954) for non-payment of rent or service charges. Licences are seemingly not covered. The moratorium is only temporary (until the 30.06.20 unless extended) and would not prevent a landlord from issuing a winding up petition or utilising any of their other rights and remedies, e.g. commercial rent arrears recovery.
Tenants will undoubtedly seek a degree of co-operation from landlords. Options include rent free periods, temporary rent reductions or moving to monthly payments. However, these are nothing more than soft concessions, with no obligation on the landlord in English law to entertain any such request. I consider many landlords in the current climate, particularly those of retail shops, will actually be sensible and seek to co-operate with their tenants in order to avoid premises becoming vacant and thus avoid the losses from extended void periods. Any such arrangements will need to be properly documented, not least because they have the potential to affect the right of the tenant to exercise any break clause provisions, which normally require rent payments to be fully up-to-date.
As always, it is crucial for the parties to a lease to carefully consider its contents and the current law before taking any action which may compromise their future position. Both I and other members of the Parklane Plowden Business & Commercial Team are able to assist throughout the process.
