The UK Government published its Coronavirus (COVID-19) action plan on 3 March 2020. It recognises the current novel virus as a “significant challenge for the entire world”. The situation is rapidly evolving necessitating both Landlords and Tenants to review their leases and identify contractual constraints impacted by the Governments response to COVID-19.
The situation is in flux. Social distancing and an initial Government mandate to close pubs, restaurants, theatres and of places of public gathering has been followed by the immediate closure of all shops selling non-essential goods as the ripple effect of the pandemic goes far beyond contractual relationships between Landlords and Tenants.
In this article, we aim to highlight some of the issues which may arise from a real estate perspective. All of this is, however, new and evolving and the legal summaries should not be relied upon. Each situation depends on specific circumstances and if you require more specific advice please get in touch with Jolliffe & Co LLP.
Landlord & Tenant Considerations:
Force Majeure – effect if required to vacate the premises
Force Majeure refers to a legal doctrine under which a party may be relieved from liability for non-performance if circumstances beyond the parties control prevent them from performing their contractual obligations.
Unlike development agreements or construction contracts, leases do not generally contain force majeure clauses.
Most standard commercial leases will include an obligation on the Tenant to comply with all statutes, notices or orders made by competent authorities. Following the Government’s ‘instruction’ to retail businesses selling non-essential goods to close, the cessation of trade in compliance with this ‘instruction’ raises questions as to how this measure is reconciled with a keep open clause or turnover rent obligation in a lease . Should a Landlord expect to continue
to receive rental income under the lease provision under this forced closure? Can rent suspension clauses be applied under the lease insurance provisions? Likely not as rent suspension clauses will normally only apply in the event of material damage and destruction to the premises.
Frustration – If prevented from occupying premises can the Tenant look to the doctrine frustration
This is best described as “frustration of purposes”. If a contract is signed, including a lease, based on certain assumptions but an event occurs which renders it impossible to perform an obligation that was originally envisaged when the contract was made, then can a Court provide relief? However, frustration is a high bar and a very difficult position to argue. This is especially so if the period during which the Tenant is unable to occupy is only temporary as is the present expectation.
Withholding of Rent
Most leases will not allow the Tenant to withhold rent regardless of the circumstances. Even if the lease contains a force majeure provision, most will expressly exempt “payment of rent”.
Both Landlord’s and Tenant’s should check their insurance policies and the specific policy terms to determine possible coverage in the event of business disruption or loss of rent and ensure compliance with all applicable notice requirements where there are grounds for potential claims.
Business Interruption Policies
These are usually only linked to property damage which renders the premises incapable of operation. If a Tenant does have non-damage business interruption cover the question will still arise as to whether COVID-19 is covered unless it is expressly mentioned in the policy
which is likely not to be. Specific terms of each policy will need to be considered in each case. The Government has declared coronavirus a “notifiable disease” – does this open the gate to a potential claim.
Closure of Common Parts
Landlords are now forced to close shopping centres which will include the common parts. Whether in relation to retail leases and anchor tenant provisions, parties should carefully check the service charge provisions in their leases to assess the impact of closing such common parts.
Most but not all businesses will be adversely impacted by COVID-19. Depending upon business sector, the impact may for some simply affect operational efficiency and for others may trigger insolvency irrespective of the Government relief packages delivered. It is important to keep up-to-date with the latest guidelines issues by the World Heath Organisation and the UK Government and for both Landlord and Tenants to carefully read their leases now in order to mitigate their risk of suffering negative impacts from COVID-19