Commercial Leases and Covid-19 - Points to ConsiderPublished on: 01 April 2020
As a result of the current Covid-19 pandemic, these are concerning and unprecedented times for both landlords and tenants of commercial premises.
Specific advice should be sought before any action is taken and our solicitors within our commercial property team based in Shrewsbury are on hand to assist you. In the meantime we have identified some general points for consideration;
Impact of the Coronavirus Act 2020
Section 82 of the newly introduced Act impacts upon forfeiture of commercial tenancies for non-payment of rent. The moratorium applies to arears incurred prior to the coming into force of the Act.
The effects of the Act are that the landlord’s right to forfeit is suspended.
It is not the case that no business will be forced out of its premises if it misses a payment in the next three months; it is simply that no business will be forced out of its premises in the next three months if it misses a payment.
Section 82(1) provides that:
“a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period.”
Relevant Business Tenancy
A “relevant business tenancy” means (a) a tenancy to which Part 2 of the Landlord and Tenant Act 1954 (LTA 1954) applies or (b) a tenancy to which that Part of that Act would apply if any relevant occupier were the tenant: section 82(12).
Pursuant to section 23 thereof, Part 2 of the LTA 1954 applies to any tenancy where the demised premises (or part) are occupied by the tenant for business purposes.
The Relevant Period
The extent of the restriction on forfeiture of leases of business premises for non-payment of sums due from the tenant is however limited to “the relevant period”. This is the period from 26 March 2020 and ending on 30 June 2020 (section 82(12), CVA 2020). Note the period may be extended by regulations.
Consequently there is, initially a three month period of grace within which forfeiture for non-payment of rent is precluded. It is also worth noting that ‘rent’ is wide ranging and can include other payments due under the lease.
It is however important to acknowledge the limitations of section 82(1), even in the context of non-payment of rent. These are as follows:
- The Act does not extinguish the tenant’s liability for the rent payments.
- The Act does not extinguish the landlord’s ability to exercise any other lawful remedies available to it – for example a breach of covenant action (save for non-payment of rent).
- When the Act comes to an end (whether from 1 July or any later date), a landlord will, if it then desires, be able to forfeit the lease for non-payment of all the accrued arrears. It is important to note that Section 82 gives a tenant just a short window (during the COVID-19 outbreak) in which it is immune from forfeiture if it fails to pay its rent, but does offer long-term relief.
- The tenant will also not be able to rely on any acts by the landlord during the relevant period as waiving their right to forfeit for earlier non-payment.
If you are a tenant
If you pay rent in accordance with a turnover clause as opposed to one based upon market rent, you may see a decline in takings for your business as a result of the recent government restrictions. Consequently you may wish to see a reduction in the amount of rent payable.
Whether this applies will of course depend upon the specific turnover provisions contained within your lease.
- Breach of landlord covenants
If you are a tenant of a multi-let building and the landlord is required as a result of Covid -19 to close then it could be argued that the landlord is in breach of its obligation to allow you quiet enjoyment as such closure would result in a tenant being unable to gain access to the premises. A tenant is entitled to exclusive possession of the premises. If this has or is about to happen, it may be worth taking steps now in order to raise a claim later for damages against your landlord such as loss of profit accounts.
- Break clauses
You may want to double check your lease for any break clause provisions in case you want to end your lease earlier in light of the circumstances.
- Force majeure clauses
These are not common in leases but it is worth checking for a 'force majeure' clause which could allow you to say that your obligations in the lease are suspended because of Covid-19. Be aware though the landlord could also use these provisions if they apply.
If you are a landlord
- Rent suspension
The law does not provide that rent suspension provisions must in the current circumstances be applied – this will be a matter for negotiation between the you and your tenant. You may decide to defer, reduce or suspend the rent for a period to avoid tenant insolvency. Any decisions of this type must be documented very carefully.
In most leases the obligation to pay the rent is only suspended, or the amount of rent reduced, where there has been "damage" to or "destruction" of the premises by an insured risk or, in some cases, an uninsured risk. Covid-19 itself does not cause physical damage to or destruction of premises, so these provisions are unlikely to be engaged. It will be a matter for the landlord to prove that Covid-19 does not fall within the definition of insured risks as provided for by the lease and it could be argued that this is too far removed in order for the tenant to make a successful claim.
- Force majeure clauses
These are not common in leases but it is worth checking for a 'force majeure' clause which could allow you to say that your obligations in the lease are suspended because of Covid-19. Be aware though the tenant could also use these provisions if they apply.