The coronavirus pandemic raises many crucial questions for both landlords and tenants given the impact of the Government’s dramatic intervention to slow the spread of COVID-19. The retail, hospitality and leisure sectors were the starting point, but the extension of emergency powers and closing means that the vast majority of landlords and tenants are now faced with challenges.
Each individual lease is different and much will depend on the terms of the lease itself. However, below is some general guidance to frequently asked questions. The information is based on “usual” clauses found in many commercial leases.
Must landlords offer their tenants rent concessions?
In a way, yes. Quarterly rent payments would normally be due on 25 March, but it appears most if not all commercial tenants have been given a last-minute reprieve by the UK Government to allow them to suspend rent payments – without risk of eviction - for at least three months. This will be particularly welcomed by tenants in the retail, hospitality and leisure sectors. The landlord’s usual discretion as to whether it wants to grant any rent concession at all, has been severely weakened (at least for the immediate future). Landlords are not able to pursue forfeiture (eviction) of these tenants during this period.
This is not a rent holiday; it’s deferment. All commercial tenants are still ultimately liable for the rent.
Any actual rent concession should still be formally documented in writing by way of a carefully drafted side-letter or agreement.
The Government has said that it is in talks with landlords, and is monitoring the cash flow of “affected property firms”.
What is a “force majeure?” clause?
There has been much talk about force majeure clauses, which come into play under a contract when an extraordinary event or circumstance beyond the parties’ control prevents one (or all) of them from fulfilling their obligations and therefore changes the parties' obligations and/or liabilities.
Can tenants argue that the lease is suspended due to “force majeure?”
Probably not. This clause is not commonly found in modern commercial leases and so leases will continue and, other than the current temporary government measures, the parties must continue to carry out the obligations contained in them.
Modern commercial leases only provide for a rent suspension if the premises are damaged, destroyed or unusable due to an insured risk. The rents are unlikely to be suspended under the lease insurance provisions, which usually relate to property-only matters (specifically, property damage).
What about business interruption insurance?
All tenants should check their business interruption (and other) insurance to see whether rent is covered while the premises are closed. However, most insurers have already stated that their policies only cover specified diseases and since coronavirus was unknown until recently, it is not covered.
Can a tenant choose to withhold its rent?
No. A well-drafted lease usually includes a clause that provides that the tenant cannot withhold rent payments. As things stand, any tenant taking advantage of the eviction moratorium will still – eventually – have to pay the current quarter’s rent under the lease.
Can landlords enforce a keep open covenant?
As part of social distancing measures, not only have all restaurants, bars, cafes and clubs had to close their doors, but “non essential” shops have now been told by the Government to follow suit. Many retail leases have “keep open” clauses, especially those found in shopping centres. Although, technically, such closure is a breach of any “keep open” covenant, these obligations are difficult for landlords to enforce, unless the tenant is the anchor in a scheme. Landlords can seek damages against tenants for failing to open but this is difficult to prove and may be unlikely to succeed in the current environment.
Modern leases also require tenants to comply with statutory regulations, and the common sense approach is that this will have to take precedence over any keep open covenant.
Who has to pay for the extra cleaning costs in a tenanted building?
A well-drafted lease usually has a “catch-all” clause allowing the landlord to recover all reasonable costs from the tenant through the service charge; this is likely to cover any extra deep-cleaning cost, as well as the cost of providing additional resources such as hand sanitiser.
What rights does the landlord have when faced with non-payment of rent?
The current three month moratorium aside, refusing to pay the lease rents would normally entitle the landlord to end (forfeit) the lease, and will still entitle the landlord to issue a petition to wind up a company tenant, instruct bailiffs to collect goods to the value of the lease rents, or to issue a claim in court for the arrears. If the landlord has a rent deposit, it is entitled to dip into it to cover the immediate shortfall.
So what can tenants do when loss of income leads to difficulties on paying rent?
The new eviction moratorium measures may remove the immediate cash flow problem of the March quarter rent day, but the onus for negotiation is now with the landlord and the tenant to reach an agreement on payment.
What about rent deposits?
It is quite common for landlords to hold a sum equivalent to between three to twelve months rent, as a rent deposit. Even if a landlord holds a rent deposit, using it to make up any shortfall in rent payments is entirely discretionary. In addition, any withdrawal made by the landlord still may have to be paid back by the tenant. Logically, the same protection against any risk of eviction must apply for tenants who fail to top up their rent deposit over the next three months.
The new (temporary) normal
The protection from eviction for commercial tenants for the next three months strengthens the Government’s existing support package for businesses, which includes a 12-month business rates holiday for businesses in leisure, hospitality and retail, employment support and the suspension of VAT payments for three months.
Even before these recent measures, commercial tenants were already asking landlords for rent holidays, monthly rather than quarterly rent payments and rent reductions due to forced closures or loss of foot fall. Many tenants will be relieved by this temporary measure, but the Government may now need to look at further measures to support commercial landlords as well.
The above is intended as a general guide only, and reflects the position at 24 March 2020. However, with new measures seemingly being introduced on an almost daily basis, both parties should seek legal advice before taking any action. If you require any advice or assistance on the above, please contact Maria Guida, in our Guildford Office, or your usual DMH Stallard LLP contact.