By Paul Henson and Ben Gildea

The last thing the Real Estate industry needed in the UK after the confidence-sapping years dealing with Brexit is the further disruption being wrought by the COVID-19 virus. We are beginning to experience first-hand similarly extreme lockdown measures to those previously taken by the authorities in China and across Europe meaning that people can now only leave their homes in very limited circumstances with all but essential places ordered to close and public gatherings of more than two people prohibited.

The above is undoubtedly having a significant economic impact and has already resulted in a wave of new measures from the government to try and sure up ailing businesses including a rescue package worth £350 billion in the form of low interest loans as well as a rates holiday to all businesses in the retail, hospitality and leisure sectors for 12 months and cash handouts to smaller companies.  The government has also now taken the unprecedented step of agreeing to pay 80% of the wages of those employees unable to work due to the pandemic up to a maximum of £2,500 per month. 

In light of the unprecedented times, clients are also now keen to understand what their legal rights and remedies might be within the landlord and tenant arena. As it currently stands, we anticipate that most tenants will struggle to use their rights under their leases to mitigate their losses stemming from COVID-19 obligations given the limited scope to part with contractual obligations and suspend rents. 

However, we are already seeing signs of landlords and tenants working together to lessen the effects of the virus on struggling businesses. One such approach is to agree a rent concession which can take many guises from a rent free period to deferred payments. Whether a landlord is prepared to agree a rent concession remains an entirely commercial point but it may help to preserve otherwise perfectly model tenants and avoid empty premises which will be difficult to re-let in this current market. 

We have set out below some thoughts on how leases and tenancies might be affected in the current pandemic. The specific terms of any lease will need to be considered in detail but a few areas to consider are as follows:

1.     Has the lease been frustrated?

A tenant who seeks to argue that their lease has been terminated through “frustration” will face a number of difficulties. Frustration enables a party to be discharged from its contractual obligations where a certain unexpected event occurs meaning that it becomes physically or commercially impossible to perform the contract, or that performance would be radically different.  

Frustration can apply to leases but proving the same is very difficult. The High Court in the most recent case of Canary Wharf Limited v European Medicines Agency (2019) found against the tenant who sought to argue that Brexit had frustrated their lease.

A landlord may have grounds to argue that COVID-19 is not so “out of the ordinary” that the parties could not have considered this and negotiated terms to deal with it within the lease itself and that the principle of frustration should therefore not apply.  Our initial view is that this may well be the legal position as it stands but that if COVID-19 forces the long term closure of leased premises rendering it impossible for tenants to perform their covenants over a prolonged period, the principle of frustration may potentially be called into play and could have wider ramifications.   

In the meantime, however, those with short term or pop-up tenancies, or those who are approaching the expiry of a long-term lease, might arguably have better prospects of claiming that their tenancies have been frustrated now given the likely impact of even short term interruption. 

The doctrine of frustration might also become relevant in relation to specific covenants. For example, where urgent works are required to remedy repairing issues with the leased premises but there are no workmen who are physically available or prepared to undertake the necessary works. In those circumstances, it is unlikely that a landlord would be able to rely on the breach (if it was a tenant obligation to repair) to forfeit the lease.  

2.     Is COVID-19 a “force majeure” event?

A force majeure clause is a clause which deals specifically with how the parties’ obligations are affected by an event that impacts upon one of the party’s ability to perform. Although they are rarely seen  in modern day leases, we recommend checking your lease provisions to see if any such clause exists. 

3.     Is the tenant entitled to a rent suspension?

Again, the terms of the specific lease will need to be considered in detail. Such clauses usually only become operable when the leased premises are unable to be occupied by the tenant due to physical damage/destruction. It is unlikely to cover cases such as we are now dealing with and so it is improbable that tenants will be able to rely on this. However, we have seen cases where rent suspension applied where a means of access was obstructed. Although this often relates to insurable events, we have seen instances where it has been extended to an uninsurable event such as this.

4.     What if a tenant continues to trade when it is illegal to do so?

In circumstances where the Government has now legislated to make it illegal for tenants in the leisure sectors to continue to trade, the landlord may be able to forfeit the lease if they continue to do so. Such continuance would be in breach of the obligation that is often found in leases, which requires tenants to comply with statutory obligations.

5.    Is a landlord entitled to forfeit a lease or exercise Commercial Rent Arrears Recovery (“CRAR”) in the event that a tenant fails to pay rent?

New laws which have been passed in the House of Commons and which are expected to take effect on 26 March 2020 will mean that it is unlawful for a landlord to exercise any right of re-entry or forfeiture under a business tenancy for non-payment of rent before 30 June 2020. The restrictions also apply to any ongoing forfeiture proceedings in the courts meaning that an order for possession cannot be made to take effect before 30 June 2020. Rent for these purposes includes any sums which a tenant is liable to pay under a business tenancy including, for example, annual rent, service charge and insurance rent. 

As a result of the above, where a tenant now fails to make payment of any sums due under the March 2020 quarter day or any such sums payable on a monthly basis, the landlord is not entitled to exercise its right to forfeit the lease before 30 June 2020. 

Although there have not been any specific restrictions imposed on a landlord’s ability to exercise CRAR, it’s likely that landlords will now face difficulties in doing so given that premises may now be closed and that Enforcement Agents may not be available to attend premises at the request of landlords. 

6.     What if the tenant fails to comply with a “keep open” clause?

If the lease provides that the tenant must keep the leased premises open and trading but fails to do so, the landlord’s usual remedy will sound in damages, rather than an injunction, specific performance or forfeiture. The courts have traditionally been unwilling to order/force a tenant to carry on a trade and they consider compelling a tenant to comply with such an obligation to be more onerous and costly than any damage that might be caused to the landlord.

7.    Can a landlord recover service charge costs associated with additional cleaning or security requirements?

Again, the lease will need to carefully reviewed as to the specific terms. Such costs should be recoverable if “cleaning common parts” form part of the service charge costs (provided they were reasonably incurred).

Landlords will, of course, want to help their customers (their tenants) as much as possible during these trying circumstances. It is up to the parties to agree temporary rent reductions or suspensions and we have already seen examples of many landlords permitting their tenants to pay rent on a monthly rather than quarterly basis. The drafting of any concessions should be carefully considered and the timing of it reviewed so that the parties can return to a normal commercial relationship as soon as possible once further clarity has been established. 

8.  Are there any insurance issues to consider? 

From a landlord’s perspective, buildings insurance policies will often impose a number of fairly onerous obligations where premises become unoccupied. These can range from ensuring the disconnection of utilities, removal of hazardous materials and regular inspections.  Such obligations may have practical implications and it may therefore be advisable for landlords to work with their tenants to ensure that any necessary arrangements are put in place to preserve the benefit of insurance cover.

Landlords may also have the benefit of loss of rent insurance. This usually applies to property damage claims where they are destroyed or unable to be accessed due to some physical impediment.  It is unlikely to cover this scenario although tenant clients should check to see if uninsured risks are covered in their lease.  

On the other hand, tenants may have business interruption insurance which covers loss of income.  Most policies will provide cover should damage be caused to the premises or equipment by a named peril, such as a fire, flood or storm or from the breakdown of essential equipment. Although insurance for business interruption from Covid-19 specifically is likely to be very rare, tenants may want to check whether they have cover for “notifiable diseases” given that the government has added COVID-19 to the list of notifiable diseases commonly used as a trigger in certain insurance policies. 

A further extension to usual business interruption policies that tenants may have, although again rare, is known as “non-damage, denial of access”.  If a business is forced to close by the government or an appropriate authority this could trigger a claim under a “non-damage, denial of access business” interruption extension if the infectious disease cover is unspecified/generically worded (or if it includes Covid-19). 

An earlier version of this article was first published in CoStar on 13 March 2020 but has been updated to take into account recent Government announcements.

Further advice from our lawyers to help you and your business through the coronavirus crisis is available here