Will Tenants be able to avoid their obligations under their leases if they can’t use their premises?
COVID-19 is unlikely to provide a Tenant with grounds to be released from its lease obligations.
The High Court has recently set down significant hurdles to claims for frustration; in the European Medicines Agency case. Force majeure clauses are unlikely to apply to commercial leases except in limited circumstances (although a review of older leases may be prudent to see if such clauses exist within them may).
Are a Tenants entitled to a rent holiday?
Some Tenants may struggle to meet their rental payments. This raises the tricky issue of them balancing competing demands. If Tenants have lost the majority of their income should they continue to prioritise their rent above other obligations? Should it be the Landlord who bears the consequences of COVID-19? It is worth examining whether a Tenant’s business interruption insurance is of assistance.
Whenever a Tenant approaches a Landlord seeking to vary its rent in some way it is important to have a conversation and learn as much as possible about the Tenant’s circumstances. This information may inform current decision making and will assist the Landlord in the future. It maybe that a Landlord can ask the Tenant for evidence to back up their assertions that they can’t pay the rent. It promises to be a busy time for management surveyors.
It is unlikely that a Tenant will be entitled to a rent holiday. However it may be in the Landlord’s commercial interest to provide a rent concession in the short term. If it does legal advice should be taken and this needs to be carefully documented.
Can’t pay won’t pay?
If a Tenant misses a rent payment how should a Landlord proceed? At this precise moment in time perhaps a Landlord would not seek to forfeit a lease. This is however a fast changing situation and a Landlord may well choose to do so in the near future. It is important that Landlords proceed carefully as it is all too easy to lose the right to forfeit a lease for a period of time. Advice should be sought before communicating with a Tenant that has not paid its rent.
There has been use of the Company Voluntary Arrangement (CVA) process by many Tenants to reduce lease liabilities. There could be a new wave of CVAs particularly amongst those Tenants whom are reliant on interaction with the public. In addition, what is also likely is that (particularly with a rent quarter day coming up), a material, and sudden, negative impact on revenues could mean that there is no time for a CVA and instead the Tenant will have to seek a rent holiday/concession or worse, the protection of administration or another insolvency process.
The UK government’s current briefings indicate that they expecting a significant proportion of the workforce will be absent from work at any one time. The public are being encouraged to avoid unnecessary contact with others. Anecdotally at least footfall in retail and leisure outlets is reduced. COVID-19 could be with us for a while yet and it seems likely the economy will be significantly affected. It is important for Landlords to plan how they will deal with their Tenant’s suffering a reduction in income over a significant period of time.
It is unlikely that Tenants will be able to use the current crisis to unilaterally avoid their obligations in their leases. Force majeure and frustration are unlikely to be available to Tenants but it is important for Landlords to examine the lease clauses in each situation. In addition we wait to see if HM Government will intervene in this area to prevent occupiers from going to the wall. There is no indication that they will at the moment.