How COVID-19 Affects Commercial and Residential Leases

Recent events are putting considerable strain on corporate occupiers of leasehold premises, particularly within the retail and leisure sector. launched below are some options available regarding commercial leases and data gathered from speaking with others within the industry.

Tenants must check their individual leases, as all leases are different, but the below is that the “usual” position under leases generally. it’s unknown how landlords or the courts will react to any action taken by tenants, so this briefing is solely an opinion and not advice. Before taking any action, a tenant should seek formal advice from their lawyers who also can review any side letters/agreements for you that landlords may require.

1. Staying open

Most retail and leisure operators have now been ordered to shut. Whilst many retail and leisure leases contain on obligation to stay open, they might usually allow closure where required by law and frequently leases require tenants to fits any legal requirements regarding the property.

The following therefore only applies to a get few retailers allowed to stay open by the govt (chemists, supermarkets, DIY stores and funeral operators, generally).

In regard to those retailers, their leases may allow closure where remaining opening is not any longer possible thanks to catastrophe events, which should cover closure thanks to Covid-19, particularly where tenants have a obligation to guard the health of their staff.

If such an exclusion isn’t present, it’s thought to be very difficult to enforce “keep open” clauses unless the tenant is that the anchor in an exceedingly scheme. Otherwise, at best, landlords can seek damages for failing to open but this is often difficult to prove and presumably more so during this environment where other tenants are closing (with most forced to close) for the identical reasons.

However, care has to be taken in turnover rent (and some other) leases where they contain a penalty for closure in breach of a “keep open” provision. Some leases allow the owner to charge 25% or more of base rent as a penalty and, in turnover rent leases, whether or not no penalty applies, you’ll still pay a turnover rent supported a mean daily turnover for days closed breach of those provisions instead of no turnover rent in the least.

However, some consider that where closure is thanks to a obligation to guard the health of staff, and not just to avoid paying rent, then it should be that a court wouldn’t enforce payment of any penalty, especially where closure is enforced by the govt.

2. Rent and repair charge

The rents are unlikely to be suspended under the lease insurance provisions, which usually relate to property-only matters (relating to property damage) and indeed landlords will see this outbreak as being a tenant’s business risk and a matter outside the lease.

Fortunately, S.82 of the Coronavirus Bill 2020 proposes to forestall landlords either from effecting forfeiture or, if they have already got an order for possession to be enforced, enforcing a possession order between the day after the Bill becomes law and 30 June 2020, for non-payment of rent. “Rent” includes any sum a tenant is prone to pay under a business tenancy.

However, whilst a moratorium on lease forfeiture (termination) is currently in situ, refusing to pay the lease rents could still entitle the owner to issue a petition to finish up the tenant company, instruct bailiffs to gather goods of the worth of the lease rents or make claim for losses/payment within the courts. this might involve the tenant being tense or incurring costs in legal proceedings. The moratorium on forfeiture is barely temporary and any rents not paid will remain due once the moratorium has been lifted. thereon basis, you’ll consider that simply writing to the owner with a refusal to pay the rents for the foreseeable future isn’t recommended.

Practically, the question arises whether, within the current environment, landlords will forfeit leases within the future and be left with voids they can’t fill if the bulk of tenants have under paid rent. However, there’s no guarantee and it’d depend upon each lease, property and landlord. Already we’ve seen landlords threaten to require action when faced with a refusal from their tenant to pay the rent.

So what can tenants do to ease the burden?

– Some clients are making it clear they’re going to pay the March quarter rent bill but only 1 month at a time. this might be some kind of mitigation if a landlord objects to the proposal, because the tenant hasn’t refused to pay the rent and has already imply a payment plan, but again advice is required in each case. If the owner doesn’t agree, it might retain its rights to enforce the recovery of any shortfall.

– Speaking with the owner to debate the problems and any potential solutions should be the primary port of call. Tenants could ask the landlord:

• for monthly rental payment instead of quarterly;
• for a moratorium on rental payments for 3–6 months. If the owner objects to a moratorium, the tenant could suggest that those rental payments are then meet the subsequent 6 months once all has returned to normal;
• for a discount in rent; or
• that the rent is permanently or temporarily converted to a turnover-only basis; or
• that the rent is reduced by 50% so both landlord and tenant “share the pain”.

However, how landlords will react to any such proposals in each case is probably going to vary. Before taking any action, a tenant should seek formal advice from their lawyers who also can review any side letters/agreement.

Landlords and tenants must recognise that to co-operate with one another at now would make the foremost commercial sense. In fact, market intelligence seems to be that almost all retail and restaurant companies are inquiring for a minimum of one in all the above from their landlords and a few are aggressively refusing to pay rent. Whether anyone can read into that that landlords won’t refuse or won’t take action against “the herd”, could be a commercial decision for every tenant.

3. Failure to pay rent

There are other ancillary issues which will also arise if many tenants have personal concessions, like reduced rents or turnover-only rents, by way of a side letter, but the majority of such arrangements are dependant on continuing to pay the rents (and in some cases remaining open). on it basis, failure to pay rent (and closure, while legally required) may lead to the loss of these concessions and potentially a pointy increase in rent.

4. Insurance

Tenants should also check their insurance policies on whether losses because of viruses are covered. Companies could have the subsequent insurances which they’ll wish to check:

• General Liability insurance;
• Business Interruption policy (either a standalone or a part of a General Liability policy attached as an endorsement);
• Crisis Management insurance; and
• Mitigation insurance.

However, early indications seem to be that Covid-19 isn’t covered, notwithstanding enforced closure, and after all AXA has published a bulletin that almost all insurances won’t cover a plague unless it’s expressly mentioned in an exceedingly policy, which it’ll not be. it’s going to be possible to create a claim for losses by act of God if this clause/risk is within the policy.

5. Termination

If you don’t have a lease event like a chance date or lease expiry, you’ll not be able to terminate your lease. A lease cannot be said to be “frustrated” as a results of the outbreak of Covid-19 and then at an end in these circumstances, and it’s highly unlikely a lease contains a tragedy clause permitting termination.

6. Landlords closing centres and customary parts

If a landlord closes a centre or any common parts, you’ll have to check the lease on the landlord’s obligations and any potential claims. Certainly during this case, your charge payments should be reduced or suspended, but again tenants will have to check their leases.