COVID-19 has already had a massive impact on our daily lives, and with the increasing restrictions on movement and no real certainty on how long these restrictions will be in place, landlords and tenants are understandably concerned.
This concern is especially acute now with the arrival of the March quarter day, meaning that tenants who have already seen an enormous drop in business over the last month, also face the prospect of having to pay the next quarter’s rent and service charge.
It is inevitable that many tenants will struggle to find the funds needed to pay the full quarter’s rent when faced with a rapidly falling income and outgoings that are likely to be reducing at a far slower rate.
Apart from the general package of relief measures announced by the Government in the last weeks, the emergency Coronavirus Bill (“Bill”) that is currently going through Parliament includes specific measures intended to ensure that commercial tenants who are unable to pay their rent are not evicted during the next few months.
The specific provisions relating to commercial leases are currently contained in section 82 of the Bill (section 83 for Northern Ireland), and provide that a right of re-entry or forfeiture for non-payment of rent, contained in a commercial lease cannot be enforced during the “relevant period,” which is currently stated to run through to 30 June 2020, albeit that the Bill contains provision for this period to be extended if that is deemed necessary by the Government. Rent is defined in section 82(12) of the Bill as "any sum a tenant is liable to pay under any relevant business tenancy". This means that, depending on the lease terms, this could also include insurance, service charge payments, and interest.
There are also restrictions on forfeiture proceedings for non-payment of rent which have already been commenced, intended to ensure that any order for possession that is made in those proceedings will not take effect before the expiry of the “relevant period.”
It is important to bear in mind that commercial tenants will still be liable for the rent falling due during the “relevant period.” The rent is not cancelled or waived as the Bill simply delays the landlord’s ability to forfeit the lease for non-payment of the rent without impacting on the other remedies that a landlord has in such circumstances. Indeed the Bill expressly preserves the landlord’s ability to forfeit a lease once the “relevant period” has expired, irrespective of what other steps the landlord might have taken in the meantime to secure payment of the outstanding rent. Unless the landlord has given an express waiver of the right to forfeit, in writing, the landlord’s conduct will not waive its right to forfeit.
Having said that, the traditional remedy of distraining for rent, now covered by the Commercial Rent Arrears Recovery procedure (CRAR) may well be of little help in the current situation, where a lot of tenanted premises will be closed and the property secured, making the seizure of good impossible. Whilst court proceedings seeking judgment for the outstanding rent remain a possibility that also may be of limited use where the tenant does not have the funds.
The Government appreciates that it is not only tenants who are likely to face problems, and has stated that it is actively monitoring the impact on commercial landlords’ cash flow and that it continues to be in dialogue with them. However, in the meantime the best course of action has to be for landlords and tenants to remain in close contact and to try and find a practical solution that enables both parties to survive the current crisis and to emerge with viable businesses at the end. Insofar as agreement can be reached between the parties on the timing of rent and other payments due under the lease, then that agreement should be clearly documented so as to minimise the potential for future disputes.
However, it is understood that it will not always be possible for the parties to reach agreement, and that alternatives steps may need to be considered. We look at a number of alternative scenarios below.
Whilst the Bill will provide some reassurance to tenants that they will not be evicted for non-payment of rent, at least for the next few months, that does not prevent the landlord from looking at other recovery options, including those we touched on above, or indeed initiating one of the insolvency processes such as bankruptcy or winding up. As such, it would be sensible for a tenant to consider whether there is any basis upon which it might be possible to legally withhold rent during this time.
In practice, very few leases allow the tenant to withhold rent in any circumstances, and even though many will include a provision allowing for the suspension of rent in certain circumstances such as the premises being damaged or destroyed by an uninsured risk, it seems unlikely that the closure of a property due to COVID-19, without there being some physical damage, would fall within the definition of an "uninsured risk", and any such claim might be very hard to prove. However, there are variations to standard rent suspension clauses, and it would therefore be sensible to review each individual lease clause carefully.
Many tenants may have business interruption insurance policies, and whilst these are again usually linked to actual damage to the property in question, the wording can vary such that individual policies should be reviewed in order to decide whether there is any prospect of recovering losses suffered as a result of an inability to trade from the premises.
If the Government orders the closure of buildings as part of emergency measures that might be an insurance trigger as such policies might cover compulsory closure of the property.
Whilst the Government has dealt with forfeiture of commercial leases in the Bill, there remain (at least in theory) a number of alternative routes by which a lease could be brought to an end by a tenant who seeks to limit his ongoing liabilities.
- Break Clauses
If either party wants to terminate the lease, then the existence of a break clause would be the best way of achieving this, albeit that the ability to exercise a break, and its timing, would depend upon the actual terms of the break clause.
A contract may be frustrated if an unforeseen event occurs that makes it impossible to perform the contractual obligation, or the obligation is radically different to that originally envisaged when the contract was made.
However, it is very difficult to satisfy the frustration test, and is almost unheard of in the case of a lease.
In the recent case of Canary Wharf (BP4) T1 Limited & Others v. European Medicines Agency  EWHC 921, the High Court held that Brexit didn’t frustrate a lease, pointing out that the European Medicines Agency’s (“EMA”) lease catered for an involuntary departure by EMA from the premises by virtue of the alienation provisions, and that there was nothing legally preventing the EMA from operating from the premises and complying with its obligations in the lease.
Accordingly it seems unlikely that an argument that a lease has been frustrated would succeed, although if the Government does prohibit the use of building, depending on how long that prohibition lasts, this is a question that might be worth revisiting.
- Force majeure clause
A force majeure clause usually provides that upon the occurrence of a specified event (e.g. a catastrophe or "act of God" outside of either party's control), the parties can either terminate a contract or possibly suspend/delay performance of their obligations.
Whilst it will depend on the exact wording, even if a lease contains a force majeure clause, as the impact of COVID-19 is not a specific event, but rather an evolving state of affairs, it would probably be hard to establish that it is a force majeure event sufficient to allow for the termination of the lease.
With the rapidly evolving situation, and the increasing level of Governmental intervention, it may well be difficult for both landlords and tenants to know how to deal with the day to day operational issues that will inevitably arise.
Whilst it is to be hoped that most will seek to co-operate in order to find a practical solution that minimises the loss to each, if disputes do arise, then the terms of the lease will almost inevitably be the starting point for both parties. A number of specific lease provisions to bear in mind include:
- Quiet enjoyment covenant in the lease,
Such clauses are intended to prevent a landlord from disrupting a tenant’s use and enjoyment of the premises. On the face of it this provision should be helpful if the landlord seeks to use COVID-19 in order to prevent the tenant from accessing to the building (more likely in a building which has multiple occupiers).
However, where the landlord's actions are as a result of Government advice, or indeed Government instructions, a tenant may find it hard to prove its case.
- Keep Open Covenants
It is really only in very exceptional circumstances that the courts in England and Wales will enforce keep open covenants by ordering specific performance, and in the current situation it seems unlikely that a landlord would obtain a court order forcing a tenant to re-open.
Whilst the landlord may have a damages claim instead, the damages in such circumstances are difficult to value, and the current situation (where there will be few shoppers in any event) is likely to make it even harder for a landlord to substantiate such a damages claim.
In addition, there is likely to be a covenant in the lease to comply with all statutory and Government requirements, which will almost certainly override any keep open clause. As such, if the Government has advised or created new legislation forcing premises to close then there is unlikely to be any action a landlord can take.
- Service of Notices
Given the current situation it is more important than ever that both landlords and tenants look ahead and, insofar as is possible, proactively manage their property portfolios. Apart from looking at break provisions and rent review clauses, it will also be important to review forthcoming lease expiry dates and to consider whether any notices might need to be served under the Landlord and Tenant Act 1954.
Whilst postal services appear to be largely unaffected at the moment, it is possible that we may see increased disruption, and personal service is already likely to be difficult given the additional restrictions on movement introduced this week. This means that service provisions in leases, as well as statutory service provisions, need to be checked carefully to consider whether alternative methods of service can be used.
It is also important that landlords and tenants who believe that they might want to serve any notices in the next few weeks or months let their legal advisers know as soon as possible so that the necessary preparation can be done well in advance so as to allow for disruption to the postal service or to any of the services that are provided by Royal Mail such as guaranteed next day delivery as extra time may well be needed.
It is also worth noting that the Government has introduced a business rates holiday for retail, hospitality and leisure businesses in England for the 2020 to 2021 tax year, and a business that received the retail discount in the 2019 to 2020 tax year will be rebilled by their local authority as soon as possible.
A business is eligible for the business rates holiday if it is a:
- business is based in England; and
- is in the retail, hospitality and/or leisure sector
Properties that will benefit from the relief will be occupied properties that are wholly or mainly being used:
- as shops, restaurants, cafes, drinking establishments, cinemas and live music venues
- for assembly and leisure
- as hotels, guest & boarding premises and self-catering accommodation
No formal steps need to be taken to access the scheme, and the reduction will apply to the next council tax bill in April 2020. Local authorities should reissue the bills automatically to exclude the business rate charge.
For further information regarding the issues raised here, or for more specific advice, please contact a member of the Property Litigation team at Knights plc