The unprecedented outbreak of the coronavirus COVID-19 is likely to have a significant effect on commercial landlord and tenants.
As a commercial landlord you might be concerned about empty properties, having to take on liabilities for business rates and utilities and your options if your tenant cannot pay its rent.
We have produced the following guide that we hope will assist you. However, it is important to seek legal advice before deciding on how best to proceed, particularly since every lease is different.
1. Can my tenant terminate its lease because of COVID-19?
It is unlikely that COVID-19 will, of itself, allow a tenant to terminate a lease. Some points to consider are:
• Walking away – a tenant cannot simply walk away from a lease and expect the lease to end. A surrender of a lease by a tenant needs to be accepted by a landlord (although a landlord’s actions can sometimes amount to acceptance – for example, a landlord accepting the keys back from the tenant). However, even if the lease is surrendered a tenant will remain liable for any arrears and dilapidations up to the date of surrender.
• Force majeure - leases sometimes contain “force majeure” clauses which may allow a party to terminate a lease if it is prevented from performing its obligations in the lease due to an extraordinary event or circumstance beyond its control. Although it will depend on the wording of the force majeure clause in question, it is unlikely that COVID-19 will be covered by such a clause.
• Frustration – if something happens after a lease has been entered into that makes it impossible to fulfil the obligations in the lease or makes it something radically different from what was agreed it might be possible to terminate the lease on the grounds of frustration. However, to date there have been no reported cases in England and Wales where a lease has been frustrated. Whether this will change remains to be seen but it will be a matter for the courts to decide.
• Break clauses – if there is an upcoming tenant only break clause in the lease a tenant might seek to exercise the break. However, it would still be liable for arrears and dilapidations up until the break date (unless, in the case of a release of the dilapidations obligations is agreed). Exercising a break requires strict compliance with the terms of the lease and there may be conditions attached.
2. Does my tenant still have to pay its rent?
Although your tenant is still obliged to pay the rent, you might expect your tenant to approach you to seek a rent reduction, a rent suspension or a payment plan.
As these are difficult times for both landlords and tenants we would encourage you to try to reach a commercial agreement regarding the rent and ensure that any agreement is fully documented in writing.
3. Can I terminate my tenant’s lease if it falls behind with its rent?
Most leases will allow a landlord to “forfeit” (that is, terminate) a lease on grounds including where rent is in arrears for a certain period of time set out in the lease (usually 21 days).
However, as of 26 th March 2020 the Coronavirus Act 2020 came into effect. The Act states that landlords will not be able to forfeit for non-payment of rent. This is expected to last for three months but is designed to encourage landlords and tenants to communicate in order to reach a reasonable commercial solution.
Whilst landlords might be worried about non-payment of rent for the March and June quarter days, landlords will still be able to forfeit for non-payment of rent after the three month moratorium has ended, assuming it is not extended.
Landlords’ other options are also not affected (such as serving a statutory demand prior to bankruptcy or a winding up petition, exercising the Commercial Rent Arrears Recovery (CRAR) procedure (if the premises are still open), deducting from rent deposits and issuing court proceedings for the arrears).
4. If my tenant closes the premises is it in breach of its lease?
Some leases (particularly in the retail sector) contain “keep-open” clauses which mean that a tenant would be in breach if it closed the premises for a certain amount of time set out in the lease. However, most leases also contain a clause that requires tenants to comply with statutory obligations. If a tenant is required to close due to a statutory obligation, it could be argued that this would override the keep open clause.
Overall, we would encourage proactive communication with your tenant given COVID-19 is likely to have a profound impact on businesses which is likely to last for at least several months.
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