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Commercial Leases and the impact of COVID-19

Landlord and Tenant update - Commercial Leases - 27.03.2020

On 23 March, the government announced that businesses and premises which are “non-essential” must close. A table outlining the businesses and premises should be closed is available here. 

Many businesses will be worrying about their ability to pay rent and may be wondering if there is way to end their Lease early. The current situation raises questions for both landlords and tenants of commercial premises. 

What a landlord or tenant can do will depend on the actual terms of the lease in question, so you should seek advice from a solicitor on specific issues, but this article may assist with any general queries you may have. 

Can a Tenant end their lease early because of coronavirus? 

Many tenants may be wondering if they can rely on force majeure or the doctrine of frustration to end their lease early. 

Force majeure 

Modern leases generally don't contain force majeure clauses allowing parties to end the lease in an event beyond the control of the parties such as a natural disaster. A party can only seek to terminate a contract using force majeure if it contains an express force majeure clause.  In the absence of such a clause, tenants aren’t able to rely on Covid-19 and the surrounding circumstances to end a lease and so the obligations will continue.  

Frustration  

Many parties may seek to rely on the doctrine of frustration but there is a high bar to pass. A contract will be frustrated if an event occurs that renders further performance of the contract impossible, illegal or something different from what was contemplated by the parties when entering into the contract. With the current situation surrounding Covid-19, it would be unlikely that a Tenant could successfully argue that it was impossible to perform their obligations in the Lease and that the lease has accordingly been frustrated, especially as it is likely that the period a tenant will be unable to occupy the property is only temporary. It may be possible to successfully argue frustration for very short term, but there is still a high bar to pass and it will depend on the context and wording of the Lease itself.  

Break clause 

If there is a break clause in the lease in favour of the tenant, this can be relied on, but tenants should pay attention to the wording of the clause and the notice requirements. Break clauses are usually only exercisable at a certain point in the term of a lease, so this is unlikely to be of assistance to many. 

What happens if a tenant is unable to pay rent? 

A tenant will generally need to continue paying rent even if the building has been closed or their building must close under the government’s restrictions.  

Many tenants will be unable to pay rent as they have ceased trading. Usually a landlord would be able to forfeit a lease and take back possession in the event of non-payment of rent. However, the government has provided new measures in the Coronavirus Act 2020, which became law on 25 March. Under this act, a Landlord cannot exercise its right to forfeit in relation to business tenancies on tenants with that are unable to pay their rent in the next 3 months (ending on 30 June 2020). The government can extend this end date. 

This will only delay a landlord’s right to forfeit a lease until after this period ends, so tenants will still be liable to pay the rent after the end of this period. Possession orders in current proceedings may be made but possession cannot be ordered until at least that date. 

Additionally, tenants who fail to pay rent in the next 3 months are protected in renewal proceedings from landlords relying on that failure to pay as opposition to renew the lease based on persistent failure to pay rent under the Landlord and Tenant act 1954. . 

Can a tenant rely on a rent suspension clause in the Lease? 

Generally, no.  

Modern commercial leases only provide for a suspension of rent if the premises are damaged, destroyed or unusable due to an insured risk. Insured risks would usually not cover the coronavirus outbreak as it would be unusual for insurers to cover such a risk under their standard cover. However, tenants and landlord should check with the insurance provider. 

Must a Landlord offer a rent concession? 

No. there is nothing obliging Landlords to offer this to their tenants, although it appears some are to help with the current economic climate. Whether a Landlord offers a rent holiday, reduction or changing the payment periods is entirely at the Landlord’s discretion. If a Landlord does decide to offer a temporary concession to their Tenant, this should be recorded formally in a side letter or deed of variation setting out the exact concession and for how long it is to apply. 

Can a Tenant change the use of the property, e.g. dine in restaurant to take away? 

Whilst restaurants, pubs, bars, and cafes must remain closed, many businesses are now offering delivery and takeaway for the consumption of food and drink off premises. 

Planning permission is required for businesses to carry out a change of use to a hot food takeaway, but the government has introduced a new permitted development right which allows businesses that supply food and drink to provide takeaway food. The permitted development right applies to premises where the current use falls into  

  1. Use Class A3 (restaurants and cafes);  
  2. Use Class A4 (drinking establishments such as pubs);  
  3. a mixed-use combining Class A3 and Class A4; or  
  4. a use as a drinking establishment with expanded food provision. 

This new right applies temporarily for a period of 12 months from 24 March 2020 and allows for the provision of hot and cold food for consumption off premises. Any business wishing to use this right must notify their local planning authority and revert to their previous lawful use at the end of the 12 month period. A tenant who wishes to rely on this new permitted development right should also check that no planning condition affecting the property restricts the use of this right to avoid enforcement action by the local authority.  

Even with the new permitted development right, a tenant must still comply with the terms of the lease, including the permitted use restriction. Whilst the new regulations provide that the use of the new right does not affect the use class of the property, whether a tenant must obtain landlord’s consent before operating as a takeaway establishment will depend on the wording of the actual use restrictions in the lease. 

What about the keep open clause in a lease? 

Many commercial leases contain an obligation on the tenant requiring the tenant to keep the premises open during normal trading hours. Additionally, many leases impose an obligation on tenants to comply with statute. If government regulation forces closure of premises, the covenant for tenants to comply with statutory regulations will be likely to take precedence over a covenant to keep the premises open.  

Where there is no obligation on the tenant to comply with statute, or no statute requiring the close of the business, keep open covenants are difficult to enforce. Recent case law indicates that landlords are unlikely to be able to force a tenant to open even where the lease contains a keep open clause. However, a landlord can still claim damages for breach of contract, albeit damages may be difficult to quantify. A landlord may be willing to agree to an exception to this obligation where a business is required to shut due to the government’s restrictions or regulations, and this should be recorded by the parties. 

If you are a commercial Landlord or a commercial Tenant and you have any concerns or questions please do not hesitate to contact us for free a confidential advice session by telephone or video conference in this difficult time.  

lyndsay@jamiesonalexander.co.uk

0330 0583 215




 

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