COVID-19 and commercial leases: What are your options?

25 March 2020 | COVID-19

COVID-19 and commercial leases: What are your options?

In these unprecedented times, the impact of the COVD-19 pandemic is being felt in a number of significant and drastic ways, both to individuals and businesses alike.  This article focuses on the potential options for business tenants in light of the COVID-19 pandemic.

Find more information that could help your business:

  1. What happens to my commercial lease if my business has to temporarily close because of COVID-19?
  2. Force majeure – what is this and how does it work?
  3. Can I use force majeure as a reason to suspend or not pay rent?
  4. The doctrine of frustration – can this help me?
  5. Rent free periods and rental holidays: What are your options?
  6. What happens if I do not pay rent?
  7. Will my insurance protect me?
  8. Latest update from the UK government

What happens to my commercial lease if my business has to temporarily close because of COVID-19?

The impact of COVID-19 on commercial leases is not a generic one. Each commercial lease, as an individually negotiated contract will have different terms and different levels of protection for tenants. Your starting point is to review the terms of your commercial lease to assess how much protection under the contract you have as a business tenant from the effects of COVID-19 disruption on your business.

Force majeure – what is this and how does it work?

Many English law contracts will contain ‘force majeure’ clauses but this is not as common in commercial leases. The concept of a ‘force majeure’ clause is that it is a provision in a contract that will allow one or all parties to not perform or suspend their obligations under the contract without incurring any liability, if an event that is outside of the control of the affected party occurs.

‘Force Majeure’ is a French law concept and is not recognised under English law – this means that it is very important that a force majeure clause in a commercial lease is specific and sets out clearly what ‘force majeure’ means and what happens if it occurs. Lists of ‘force majeure’ events are often included in contracts to make sure that specific occurrences are captured under the provisions and a tenant can rely on protection if they happen. Examples of force majeure events include war or civil unrest, extreme weather such as hurricanes or earthquakes, fire, floods, compliance with government regulations and epidemics or pandemics (such as COVID-19).

The key point is that because a force majeure clause does not have an English law origin, the meaning will need to have been defined in the commercial lease – typically the meaning will include wording relating to ‘an event outside the reasonable control of the party(ies)’. There is English case law that says if there is no definition of force majeure, then the clause may not be held to be valid due to the fact it is uncertain.

This again leads back to the fact that the impact of COVID-19 on your commercial lease will largely depend on the terms of the commercial lease itself. Some commercial leases contain provisions that state that a business has to be operational or ‘open’ for a certain amount of time. It is possible that due to events outside of a business tenant’s control (such as a government ordered ‘lockdown’), a tenant is unable to open or operate and the tenant may be able to rely on the provisions of a force majeure clause in its commercial lease in this circumstance.

Can I use force majeure as a reason to suspend or not pay rent?

As stated above, a lot will depend on the way in which the commercial terms are drafted, and a force majeure clause will usually be interpreted on the basis of what is specifically set out in the contract.

Trying to rely on a force majeure clause as a reason to suspend rental obligations however may be difficult. There are several cases under English law that discuss whether a detrimental change in economic circumstances can be regarded as an event of force majeure making it harder or more expensive for a party to perform its obligations under a contract. Most of these cases follow the principle that it cannot be.

In any case, it will be for the tenant to prove that the event of force majeure directly means that payment of rent is outside of its control (for example because all the banks are shut). One other significant point to note is that the event of force majeure has to be the sole reason that a business tenant is not paying its rent. As a general rule, no other event can occur that causes non-payment at the time of the force majeure event.

From a practical point of view, a force majeure notice usually has to be sent to the non-affected party. This is a formal notice and a business tenant should make sure that it is sent in the way that the commercial lease says notices should be sent.

Often, force majeure clauses will also contain an obligation on the affected party to mitigate or contain the consequences of the force majeure event they are seeking relief from, to the extent that they can. And a business tenant should be able to show that it has used its reasonable efforts to limit any resulting damage.

Finally, force majeure clauses will often state that if an event of force majeure continues for more than a certain period of time, one or both parties may be entitled to terminate the commercial lease. This could have a big impact on the operations of the business of a tenant and should be considered when assessing whether or not to invoke rights under a force majeure clause.

The doctrine of frustration – can this help me?

Under English law, a doctrine of frustration exists. The doctrine of frustration has only recently been applied to leases, and examples of English case law relating to the successful frustration of a lease are hard to come by. This doctrine may be relied on in arrangements where a contract does not contain a force majeure clause but where the performance of a party’s obligations has become impossible or where the obligation to be performed has fundamentally changed so that it has become an entirely different obligation. Proving that performance has become impossible is a tall order. If proved, the affected party is relieved from having to perform the obligation in question, but the contract as a whole may be held to have ended.

A court will usually take into account all of the facts and circumstances surrounding the event that allegedly caused a party to be frustrated but the event must not be the fault of either party and must mean that performance of the obligation is impossible, or illegal or have changed fundamentally.  Examples of frustrating events that have been discussed in English case law include fire, a change in the law and war. In this circumstance, a business tenant would need to argue that payment of its rental was rendered impossible and unforeseeable as a result of COVID-19, which is not an easy position to take without robust supporting evidence. Like the concept of force majeure, the doctrine of frustration will not apply where a party’s contractual obligations become more expensive to perform or where there has been a change in the economy to the detriment of the tenant.

Rent free periods and rental holidays: What are your options?

In some circumstances therefore, relying on a force majeure clause or the doctrine of frustration may not be appropriate and there may be other clauses in a commercial lease that a business tenant can rely on to suspend or reduce rental payments, such as the availability of a rental holiday or a rent-free period or period of reduced rent that the tenant can trigger. Rent-free periods or rental holidays are usually terms that are negotiated into a commercial lease by the landlord and tenant before a lease is entered in to.

Depending on the nature of the relationship of a tenant with its landlord, a business tenant may consider opening up a dialogue with its landlord to discuss the availability of a temporarily reduced rent, monthly instead of quarterly rental payments or a rental holiday while the tenant is impacted by the disruption in connection with the COVID-19 pandemic. This will be a commercial negotiation between landlord and tenant and as such, will not be appropriate or possible in every case. There may also be tax considerations that a business tenant will need to analyse before any rent adjustments are made and it is wise to seek professional guidance before making any changes to the terms of your commercial lease.

What happens if I do not pay rent?

If a business tenant does not pay rent under a commercial lease, then a number of consequences may occur depending on what is drafted in the lease itself. Commonly, if a tenant does not pay its rent when due it may be liable for damages to the landlord and as well as any late payment interest. In some circumstances, continued non-payment of rent may allow the landlord to forfeit the lease or stop the tenant from exercising other rights that it has under the lease or at law. As non-payment of rent can result in detrimental consequences for a business tenant, it is prudent to seek expert commercial property legal advice before suspending any rental payments under your commercial lease.

Will my insurance protect me?

Whether or not your insurance will protect you against the effects of the COVID-19 pandemic on your business will depend on the terms of the insurance policies that you have taken out. Insurance cover, much like the commercial leases themselves, are often individual to the parties that enter into them. Typically, the insurances that may deal with losses due to epidemics, diseases or pandemics are general liability and business interruption insurances, specific crisis management insurances or mitigation insurances but there may be others. If in doubt, it is important to seek guidance from a professional and/or your insurers.  

Latest update from the UK government

At the time of publishing of this article, the UK government had issued guidance setting out the emergency assistance that will be available to business tenants as part of the government’s response to the COVID-19 pandemic.

An overview of the measures is set out at https://www.gov.uk/government/news/extra-protection-for-businesses-with-ban-on-evictions-for-commercial-tenants-who-miss-rent-payments

The guidance states that unprecedented measures included in the emergency Coronavirus Bill currently going through Parliament will mean that no business will be forced out of their premises if they miss a payment in the next 3 months.

On the face of it, this does provide some relief. It means that commercial tenants that are unable to pay rent because of coronavirus may be temporarily protected from eviction if commercial landlords are not able to forfeit a lease for non-payment of rent for the next three months.

But the devil will be in detail of the final legislation as to what conditions need to be satisfied by a tenant in order to be able to exercise these rights. Currently the measures only apply to rental payments, and not to service charges, insurance and any other costs associated with a commercial lease.

The guidance also encourages collaborative dialogue between landlords and tenants as a way of achieving voluntary arrangements such as rental deferrals or holidays.

The amendment to the Coronavirus Bill on commercial leases will apply to England, Wales and Northern Ireland and will apply to all commercial tenants. The change will come into force when the Coronavirus Bill receives Royal Assent. The proposed measures will last until 30 June 2020, with an option for the government to extend this period if needed.

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