The current virus outbreak is creating unprecedented challenges for all businesses.
Even though the Government has announced a £330bn loan scheme and other financial measures, many occupiers of commercial property will be looking for opportunities to minimise overheads urgently in response to rapidly declining cash flow.
So what are the legal issues which landlords and tenants might consider?
Rent holidays and concessions
There is no legal basis for a tenant to insist upon a rent holiday or rent concession, so this is not something that a tenant can insist upon by law. However, if a tenant might potentially become insolvent due to the rental burden then a rent concession of this type could be preferable. Consideration of any request of this type will depend entirely upon the commercial circumstances of the situation. However, in the spirit of maintaining a good landlord and tenant relationship, landlords may be minded to agree more flexible payment terms in these difficult times, although may want to be mindful of any issues with insurance claims where a concession is offered specifically as a result of coronavirus.
Rent suspension clause
Most leases contain clauses which provide for rent (and sometimes also service charges) to be suspended in the event of damage or destruction caused to a property which prevents the property from being occupied. These clauses are usually linked to events arising under standard commercial buildings insurance policies, covering matters such as fire or flood. Consequently, these clauses are unlikely to apply immediately, although they could potentially be relevant if the situation deteriorates to the point of civil disorder. However, these clauses usually also dovetail with the landlord’s loss of rent insurance, meaning that insurance will step in to cover loss of rents received from the tenant.
A tenant may ask whether the obligations in its lease are suspended because of “force majeure”. There are no such provisions in most commercial leases so there shouldn’t be a way for a tenant to stop paying rent on that basis. The legal concept of “frustration of contract” could be considered in an extreme case, although this would be exceptional. The onus would be upon the tenant to establish that, subsequent to its formation, and without fault of either party, the lease or contract is incapable of being performed due to an unforeseen event or events, resulting in the obligations under the contract being radically different from those contemplated by the parties.
A second (and increasingly common) element to rent suspension is losses arising from uninsured risks. This is potentially a landlord’s biggest concern as it is not linked to the landlord’s loss of rent cover, meaning potentially rent could be suspended whilst not be recoverable through insurance. Whether or not this will apply will depend upon the exact wording negotiated in the lease. For example, if it is triggered by “an Insured Risk against which the landlord has been unable to insure on commercial terms” then the landlord should be protected. However, if rent suspension is triggered by “any risk which is not an Insured Risk” then the result of coronavirus could potentially apply, and leave the landlord exposed.
If the landlord decides to close its premises (but is not forced to) then this could be a breach of the quiet enjoyment clause within the lease. A tenant is entitled to exclusive possession of its property, so if prevented from gaining access this may be a breach on the part of the landlord. This seems unlikely, but it may be possible in some limited instances where property owners are advised, but not forced, to shut properties and / or centres.
Keep open clauses and turnover rents
Such clauses are viewed as not being directly enforceable in English law. But there may be specific commercial consequences particularly in leases with turnover rent provisions which automatically increase the base rent in the event of store closures to cover the landlord in terms of loss. Some keep open clauses do relieve tenants from the obligation to trade in certain limited circumstances and again it will be important to review the exact nature of any wording agreed.
Business interruption policies
A claim for losses incurred will depend on the terms of the policy. Generally, a policy holder would have had to specifically included cover for loss arising from notifiable infectious diseases. AXA has posted a bulletin on this which is useful reading and probably reflects the view of the wider insurance industry: https://www.axa.co.uk/coronavirus/. See also the bulletin from the association of British Insurers: https://www.abi.org.uk/products-and-issues/topics-and-issues/coronavirus-qa/#a