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The impact of the coronavirus on leases

The impact of the coronavirus raises a number of questions for landlords and tenants of commercial property. This article considers the most frequent questions we are asked.

Can I claim a reduction in rent if I am unable to use my premises?

In most cases you will not be able to claim a reduction in rent. The obligation to pay rent is usually suspended only where there has been damage to or destruction of the premises by an insured risk or, depending on the wording of the lease, an uninsured risk. If the coronavirus means that you are unable to use the premises, there will have been no damage to or destruction of the premises that triggers a suspension of the rent. The actual wording of the rent suspension clause would need to be reviewed to see whether the usual wording has been varied in a way that would allow the tenant to argue that the rent should be suspended.

If the result of the coronavirus is to reduce a tenant’s turnover, one practical step the tenant could discuss with the landlord is whether rents could be paid monthly rather than quarterly for a limited period. Whilst landlords are not obliged to agree a move to monthly rental payments, if it enables a tenant to continue trading, this may be preferable to having an insolvent tenant in the property.

There is bound to be some legal debate over this and there are inevitably calls for government intervention as it plainly does not seem right for tenants to have to pay for premises they can’t occupy but equally for landlords to receive no rent for their investments when it is also beyond the control of both landlords and tenants.

Can I claim that the obligations in the lease are suspended because of “force majeure”?

The principles of force majeure are considered in more detail here. Most leases do not contain force majeure provisions, so neither the landlord nor the tenant are likely to be able to argue that their obligations under the lease are suspended because of the coronavirus. It is our view that, based on previous case law, the courts are unlikely to imply a force majeure provision in to a lease but, a tenant faced with a landlord who demanded payment of rent without concessions in the current crisis might try to argue the point in court.

Can I argue that the lease is frustrated if I cannot use the premises?

To argue frustration, you have to show that there is some form of intervening illegality or failure of common purpose that renders performance of the lease impossible or so radically different from the parties’ expectations that frustration is justified. The threshold test for proving frustration is set very high.

The argument failed in London and Northern Estates Company v Schlesinger [1916] 1 KB 20 where a landlord let a flat in Westcliffe on Sea for three years to an Austrian national, just before the outbreak of the first world war. On war breaking out, the tenant was classed as an alien enemy. Legislation was passed that made it illegal for him to live in coastal areas. The court found that the lease was not frustrated as not all the benefit the tenant expected to derive from the lease was taken away – he could still assign or sub-let.

The difficulty of successfully arguing frustration of leases was illustrated most recently in Canary Wharf Limited v European Medicines Agency [2019] EWHC 335 (Ch). In that case, the European Medicines Agency argued that Brexit would frustrate its lease as it was forced to relocate to another member state. The High Court did not agree. In our view, it is therefore unlikely you could argue that the lease has been frustrated but, as above, we may well see parties arguing it. The main difficulty with this from the tenant’s perspective is that the lease would then be at an end. If they argue this on one property, they may well have it argued across the portfolio which is a risk most would not wish to take. The same applies for a landlord who might want to get back a marketable property but won’t want to end up with the remainder of the portfolio empty.

Will business interruption policies cover any losses I incur?

This will depend on the terms of your policy. You would have to have opted-in to cover for loss arising from infectious diseases. In addition, most policies require the infectious disease to have become a notifiable disease before the policy will cover losses. As of 18:15 on 5 March 2020, coronavirus became a notifiable disease.

Is the landlord obliged to act in good faith in relation to the lease?

Tenants may request a reduction in rent or a re-gearing of the lease terms to take the coronavirus into account. However, there is nothing in English law that would require the landlord to act in good faith and entertain that request. Although there may be commercial pressure to renegotiate lease terms, there is no legal obligation on landlords to do so.

What happens if the government forces the closure of property?

Subject to any specific legislation passed by the government to regulate the position (and we are aware of many lobbying for this), closure of a property at the request of the government would not change the underlying obligations between the landlord and the tenant. Such a closure would prevent both parties from meeting their obligations under the terms of a lease. Landlords would be unable to open properties in order to permit trade. The tenants would not be permitted to trade in any event.

Accordingly, both parties risk finding themselves in breach of their covenants. However, could it properly be said that either breach has caused any loss to the other party? Arguably not, because even if the landlord kept a property open, the tenants would not be permitted to trade. The landlord wouldn’t be able to argue that the tenant’s inability to trade had caused it loss, because the landlord would be unable to open the property to allow the tenant access.

If there is a prolonged closure of a property, tenants may look closely at the terms of their leases to see if they could operate break rights that have been granted to them.

Can I choose to close my premises as tenant?

Most leases do not oblige tenants to remain in physical occupation and trade from their premises. In the absence of a keep-open clause, the landlord will not have a right to insist that you remain in your premises and trade from them.

Some retail leases contain keep-open clauses that require the tenant to trade from the premises during defined hours. If you cannot trade from the premises because a number of staff are ill with the coronavirus, you would need to look at the terms of the keep-open clause to see if there are any exceptions that allow you to close.

A keep open clause may include an exception that the tenant does not have to trade from the premises where it is unlawful to do so. If the government acted to close premises, the tenant could rely on this exception. In addition, leases also include obligations on the tenant to comply with legislative requirements. If complying with legislation prevented the tenant from trading from the premises, it is likely that it would not be in breach of a keep-open clause.

Another possibility is that the keep-open clause allows the tenant to close the premises with the landlord’s consent. Even if the consent provisions give the landlord complete discretion, the landlord must not act in a capricious or arbitrary manner when deciding whether or not to give consent. A landlord of retailers who acted capriciously, may still face a claim from the tenant. In addition, refusing consent to close where the tenant is in obvious difficulties because of staff illness may attract a lot of adverse publicity.

The courts will not order specific performance of a keep-open covenant but a tenant would be liable in damages if it closed the premises when it was not entitled to do so. The landlord would need to prove loss. Unless the tenant is paying a turnover rent, where the landlord can establish the loss of turnover for the days on which the tenant is closed, it may be difficult for the landlord to prove that any loss has occurred.

Can I choose to close a property as landlord?

It is unlikely that a landlord who has let the whole of a building to a tenant would be in a position to close the building voluntarily. However, a landlord who has let parts of a property and retains control of the common areas, including the communal access, may need to take action resulting from its obligations as the employer of staff in the property and its health and safety obligations to tenants of and visitors to the property.

The risk for the landlord of closing premises where it is not legally obliged to do so is that it risks being in breach of its covenant for quiet enjoyment to its tenants. Whilst a covenant for quiet enjoyment can be an implied term in a lease, most leases include an express covenant for quiet enjoyment.

The wording of most quiet enjoyment clauses refers to the tenant having quiet enjoyment “without any lawful interruption” by the landlord. Therefore, a landlord should not be liable for lawful acts that prevent the tenants using and occupying the property.

As an employer the landlord will have obligations to its staff and others regarding risks posed from coronavirus. It will also have responsibilities to the extent it controls the common parts of the property for the health and safety of visitors to the property. If a landlord needs to take preventative measures to comply with its health and safety requirements, any interruption may well be lawful. If a regulatory authority, such as Public Health England, direct that a property should be closed, the landlord would be acting lawfully and not in breach of its quiet enjoyment obligations.

If the landlord had to close a property because of the non-availability of staff due to the coronavirus, the position is less clear and there is an argument that the landlord would be in breach of its obligations for quiet enjoyment.

In addition to quiet enjoyment, landlords would need to consider whether they are derogating from grant by closing property. An obligation not to derogate from grant is implied into leases. It cannot be excluded. Usually a breach of this covenant occurs outside the premises let to a tenant. For instance, where a landlord has either taken positive steps or has granted rights to a third party that render the premises unfit for the purpose for which the lease was granted, the landlord has derogated from its grant. Examples might be reducing car parking provision to unreasonable levels, moving the main entrance far away from an anchor tenant or letting adjoining premises to a tenant whose use of the premises prevents the use of the neighbouring premises.

Derogation from grant does not offer the tenant protection for actions that have an adverse economic effect on the tenant but do not physically affect the use of the property. Prolonged total closure of a property where the landlord is not obliged to do so may constitute a derogation from grant as the tenant cannot physically use the premises. A reduction in the opening hours, whilst having an economic impact, would not affect the physical use of the premises so is unlikely to be a derogation from grant.

Can I change the operating/opening hours of the property if I need to do so?

Most retail leases give the landlord the right to change the operating or opening hours of the property where it is reasonable to do so. If the government issued guidelines about acceptable trading hours during the coronavirus outbreak, it would be reasonable for the landlord to vary the hours.

Office leases may require 24/7 access to a building. In those circumstances, the landlord would not be able to vary those hours.

Will I remain liable to provide or to pay for the provision of services?

Landlords will remain liable to provide services to their properties where the leases include service charge provisions. However, if the non-availability of materials or labour meant that it is impossible to provide particular services, the landlord will be able to rely on any provisions in the lease that say that the landlord is not obliged to provide services where it is prevented from doing so for reasons beyond its control.

If a landlord needs to provide more intensive services such as providing more hand gel, carrying out deeper cleaning or increasing the frequency of toilet inspections and cleaning, it is likely that the additional costs incurred would be recoverable under the service charge provisions.

However, tenants are asking to keep other discretionary spend (such as marketing costs) to nil during these times.

Tenants will remain liable for the payment of the service charge under their leases but may well challenge what sums are being incurred.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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