How does COVID-19 affect commercial leases?

There is no avoiding the severity of coronavirus and the recent announcement that will no doubt raise questions for both Landlords and Tenants of commercial premises.

Leases are not drafted in a standardised manner and the terms contained will vary depending on the terms agreed and negotiated when the lease was entered into.

If you have specific questions, please do contact me otherwise I have set out below some 'Frequently Asked Questions' that may assist in the meantime.

TENANTS

What happens if the building that my Property forms part closes, do I still have to pay rent?

The Tenants obligation to pay rent is an ongoing one. The Landlord is permitted to close the building if there is a case of coronavirus and would be acting reasonably.

The position would be different however if the Landlord decides to shut the building with no legitimate reason.

If this happens you must get in touch with your solicitor to establish why the building has been closed preventing you from using the Property.

Even though government passes regulations stating that buildings has to shut, you will also still have to continue to pay rent.

A possibility is to ask the Landlord if you can receive a rent concession. The Landlord does not have to agree to this, but the approach should be made sooner rather than later. Landlords are likely to be more sympathetic in the current circumstances.

Any informal agreement should be documented, and the most appropriate way would be a side letter given the change is not a permanent one.

There is a rent suspension clause, do the current circumstances allow me to stop paying rent?

The rent suspension clause is not likely to have taken into account the unprecedented circumstances we face ourselves with and usually only apply in the case of damage by an insured risk and if agreed uninsured risks. The position will not differ even if by closing you are complying with government guidelines.

It is possible your business interruption insurance includes a provision for paying rent where you are unable to use the property do check. Otherwise any agreement not to pay rent will have to be by agreement with the Landlord, see above.

The Lease obliges me to stay open, what happens if I close?

The first step is to check the lease and establish if there is any carve out in exceptional circumstances. If not, it would be prudent to approach the Landlord and agree a variation to the lease either permanently by a deed of variation or on a temporary basis by side letter.

It is worth noting that any government regulations forcing closure i.e. complying with statutory requirements is likely to take precedence over any keep open clause but this is not definite.

Can I choose to close my premises as tenant?

Provided there is no keep open clause you are able to close at your discretion provided you continue to pay rent.

What about service charge?

Service charge liability will remain payable in the same way that the Landlord will be liable to provide the services.

If the Landlord incurs additional costs for example for having to clean more frequently or to take additional steps generally these additional costs will be passed on to the Tenants under the general sweeper provisions included within most service charge clauses in leases.

LANDLORDS

Am I obliged to offer a rent free?

The simple answer is no, any arrangements informally made for rent free periods during this difficult period are at your discretion. You may wish to offer a rent free to assist the tenant but there is no obligation to do so.

Any agreement for a rent free should be documented in a side letter which documents the changes and terms i.e. the duration of the rent free.

Given any rent free is likely to be temporary rather than permanent any proposal by the tenant to document the change in a deed of variation should be resisted.

Should I keep my building open for tenants? Unless and until the government imposes statutory regulations requiring property to close, you will to be required to keep your building open for Tenants.

Please check carefully the governments list of business that need to remain open at this time. As a Landlord you have an obligation to keep the property open and closing where not in compliance with statutory regulations could breach the covenants in the lease for quiet enjoyment.

The scenario differs if there has been a known or suspected case of coronavirus in the building which the property forms part. It would be reasonable for you to control access to the common parts.

Most commercial leases include a reservation for a Landlord to take such steps in any emergency.

If access to common parts is controlled or restricted and Tenants cannot access their property the building may need to close.

Landlords are normally allowed to suspend provision of services if the building has to shut in an emergency and any service charge would be reduced pro-rata.

Can force majeure be used to suspend the obligations in the lease?

No. Leases will not contain provisions to allow suspension for this reason and leases will need to on the whole continue with the obligations contained within ongoing.

Who will pay for the extra cleaning costs at my building?

This would be a cost passed to a Tenant in most leases by relying on the general sweeper clause that allows a landlord to recover all reasonable costs through the service charge.

Can I enforce a keep open covenant?

A lot of retail leases contain an obligation for the Tenant to keep open the property i.e. continue to trade. If a Tenant decides to shut its Property, then it will be in breach of any 'keep open covenant'.

This covenant is difficult to enforce, and the Landlord will struggle to demonstrate any actual loss unless the Tenant pays a turnover rent.

Landlords may not able to enforce such a covenant if the Tenant closes its business but continues to pay rent.

In the current circumstances and the government regulation for the closure of businesses, it is suspected the covenant for Tenants to comply with statutory regulations will take precedence.

If you need any further guidance, please don't hesitate to get in touch with me or a colleague in our Commercial Property team.