This document has been prepared as at 17th March 2020 as a brief introductory view of some of the legal considerations current as at that date. It should not be relied on as legal advice and, as the situation in respect of Coronavirus (Covid-19) is moving constantly, it is essential that businesses check the up-to-date government guidance and take advice that is tailored to their particular circumstances.
1. Can I withhold rent payments if I cannot occupy my property due to COVID-19?
It is very unlikely that your lease will allow you to withhold, reduce or suspend rent payments. Rent is only usually suspended following physical damage to a property by an insured or uninsured risk.
It would be worthwhile checking a sample of your key leases but we would expect that in the vast majority of cases COVID-19 would not fall within the definition of either an insured or uninsured risk and, even if it did, it would be hard to argue that it has caused physical damage to the relevant property.
2. Can I terminate my lease if I cannot occupy property due to COVID-19?
Again, it is highly unlikely.
Your lease will not contain a force majeure clause.
The doctrine of frustration can be used to terminate a contract where a supervening event, which the parties could not have foreseen when entering into the contract, renders it impossible to perform the contract or the rights and obligations set out in the contract are changed significantly from those envisaged when the contract was completed.
The Courts have set a very high bar for this test and there have been no reported cases in England where a lease has been held to be frustrated.
3. Will I breach the keep open clause in my lease if I fail to open due to a government prohibition on property openings/public gatherings?
Most leases will contain carve-outs from the obligation to keep the property open which are likely to include:
3.1.1 Failing to open where it would be unlawful to do so; and
3.1.2 Failing to open for any reason beyond the tenant’s reasonable control.
If the government imposes restrictions on the opening of certain types of property then a failure to open as a result is unlikely to breach a keep open clause.
Even if these carve-outs are not included then there will be a requirement on the tenant to comply with statute. This may conflict with the keep open covenant. We would expect the statutory compliance clause to take precedence.
4. Will I breach the keep open clause in my lease if I choose not to open despite there being no formal government ban (e.g. due to staff shortages or company policy)?
It will depend on the precise wording of the carve-outs contained within the keep open clause.
However, it is only in highly exceptional circumstances that a court in England and Wales will order specific performance and require a property to remain open. A landlord may seek damages for breach of the clause but if you are still paying the rent then it will be very difficult for the landlord to show a loss.
5. If I fail to open will this have an impact on the turnover rent payable under my lease?
It depends on the drafting of the lease. Turnover leases will generally provide that where the tenant fails to open for trade then either a fixed daily rate is payable for each day of closure or turnover is deemed to apply for the days on which the property is closed
Coronavirus and its impact on tenants (this is usually based on the average daily turnover for the property during the turnover period in question).
However, these provisions may not apply where the failure to open is due to reasons beyond the tenant’s control. It is therefore important to check the precise wording of any carve-outs to these provisions and the exact circumstances of the closure.
6. Will I be able to make a claim for losses under my business interruption insurance?
You will need to check the terms of your insurance policy. Standard business interruption policies would not cover losses incurred as a result of an epidemic or pandemic. However specific policies to cover epidemics and pandemics are available so check whether your company has cover.
7. Am I liable to pay for increased cleaning costs required as a result of COVID-19 via the service charge?
It depends on the wording of the service charge provisions.
Most service charges enable a landlord to recover costs incurred in complying with the requirements (and perhaps recommendations) of competent authorities. Even if there is no specific head of expenditure then there is likely to be a sweeper clause allowing the landlord to recover for additional services that are provided in the interests of good estate management.
It is therefore likely that a landlord will be able to recover reasonable increased cleaning costs.
8. The way forward – a collaborative approach?
Standard modern leases are unlikely to cater for many of the difficulties presented by the spread of COVID-19. Over time the drafting is likely to change but, in the short to medium term, landlords and tenants are both going to face major challenges.
Many occupiers in the retail and leisure sector have for a long time been seeking a more collaborative approach to landlord and tenant relationships with a focus on partnerships rather than the traditional adversarial approach.
Neither landlords nor tenants want to see an increase in vacant properties. Re-letting a vacant unit in the current climate is likely to be difficult. A strict interpretation and enforcement of lease provisions for a short term gain may not be the answer for the long term.
Discussions between landlords and tenants are likely to focus on the following areas with the aim of improving cash flow:
8.1.1 Rent reductions/rent holidays;
8.1.2 A move to monthly rent/service charge payments;
8.1.3 A request for a return of service charge accruals and sinking funds;
8.1.4 A reduction in the scope of services provided by the landlord; and
8.1.5 Year-end service charge reconciliations repaid rather than credited.