The COVID-19 pandemic has propelled us all into uncertain times and unsurprisingly, we have had an influx of questions from concerned tenants of commercial premises, as well as from landlords.
We have therefore put together a list of common questions and a guide to some of the issues which may be causing concerns for landlords and tenants of commercial properties:
“The next quarter rent is due for payment. Can I suspend payment of rent?”
Most commercial leases allow a tenant to suspend payments of rent if their leased premises are damaged or destroyed by defined insured risks (such as fire and flooding). Such a provision would not apply to premises being closed as a result of a pandemic because the premises are neither damaged nor destroyed.
That is not to say there are not leases out there which contain rent suspension clauses covering pandemics, but they are likely to be incredibly rare.
The short answer is that in most cases the tenant will be unable to legally suspend rent on account of COVID-19 and will be obliged, under the lease, to continue paying rent as usual.
For details of support measures put in place by the Government to help businesses follow this link: https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses
“If I can’t suspend rent under the Lease, can I just stop paying rent because of the Covid-19 pandemic?”
If you are unable to pay rent, or would struggle to do so in these difficult times, we would recommend contacting your landlord in the first instance, to try to negotiate a rent reduction or to agree a rent suspension for the period of the current pandemic.
In some instances, you may be able to ask your landlord to use some or all your rent deposit to pay the rent. Alternatively, if your rent is based on turnover (which will inevitably have been affected by the pandemic), you could ask your landlord whether they would agree to you paying monthly rather than quarterly for the period of the pandemic.
Any agreement should be carefully and properly documented by a professional to minimise the future risk of disputes or claims arising. In these difficult times, it is important to remember that it will often be in a landlord’s best interest to enter discussions with their tenants to agree a way forward, or risk their tenant not paying rent or even becoming insolvent.
If you are unable to come to an agreement with your landlord, you may decide to “just stop paying rent” but this would amount to a breach of the lease (more on that below). It would also likely damage relations between you and the landlord, which is something you should try to avoid particularly if there are still several years left on your lease.
“I’ve heard my landlord cannot forfeit the lease, is that true?”
Yes – on 23 March 2020, the Government announced that commercial tenants will be protected against forfeiture for failing to pay rent (or any other breach) until at least 30 June 2020. The Government is likely to then consider whether to extend the protection beyond 30 June 2020, but there is of course no guarantee it will.
So, although not paying rent will put you in breach of your lease, your landlord will be unable to forfeit the lease, either by peaceful re-entry or forfeiture by court proceedings.
The legislation providing for the protection from forfeiture also says that no action of the landlord during the period of the protection will amount to a waiver of their right to forfeit, unless the landlord expressly waives that right.
Subject to any further legislation introduced during the pandemic, when the protection from forfeiture ends the tenant will need to be able to clear the rent arrears as soon as possible or risk having their lease forfeited. Whether landlords decide to forfeit after the protection ends is another matter, particularly when new tenants are likely to be hard to find in the months following the Pandemic.
In summary, whilst you may decide to delay paying the rent during the pandemic, you cannot avoid paying it altogether.
“Can the Landlord take action to recover rent arrears?”
While the landlord for the time being cannot forfeit the lease because of rent arrears or some other breach, there other avenues open to the landlord to recover rent arrears:
- A Money Claim: The landlord can still issue court proceedings against the tenant for recovery of rent arrears, and any other sums owing under the lease. If the landlord obtains a money judgment against the tenant, it will have an array of enforcement measures available to it through the court to enforce the judgment;
- Commercial Rent Arrears Recovery (“CRAR”): The landlord can serve a notice on the tenant of the date its authorised agent will visit the premises to seize goods to the value of the rent arrears. The landlord does not need to go to court to use CRAR;
- Statutory Demand: Providing the rent arrears are not disputed, the landlord could serve a statutory demand on the tenant. The tenant would have 21 days to then pay the sums in the demand. After 21 days the landlord could then file and serve a winding up petition if the tenant is a corporate body. Please note the Government are likely to introduce legislation that limits the availability of insolvency procedures during the pandemic.
Tenants should also note that most commercial leases allow the landlord to charge default interest on any unpaid sums and allow the landlord to charge their legal costs of enforcing the lease to the tenant.
“The landlord has closed the building containing my leased premises. Do I still have to pay rent?”
The short answer is ‘yes’, providing the landlord was legally permitted to close the building under the terms of the lease.
Most leases of premises within a larger building (for instance shopping malls and precincts), give the landlord discretion to change the opening times of the larger building, or to restrict opening times on account of legislation or guidance. The emergency measures introduced by the Government to prohibit the opening of non-essential retailers fall within that definition.
There is of course the question whether restricting opening times as defined in the lease includes closing the building entirely.
If the landlord is not entitled under the lease to close the building, tenants should note that in each commercial lease is an implied term that the landlord will not “derogate from grant”. That means the landlord cannot do anything that detracts from the purpose which the leased premises were let or take away what was granted to the tenant in the lease.
By closing the building, it could be argued the landlord has taken away from the tenant what was granted in the lease.
There is also an express term in most leases that the landlord will not interfere with the tenant’s “quiet enjoyment of the premises”, which could have been breached for the same reason.
The difficulty for the tenant is that applying to the Court for order forcing open the building (if the landlord is not legally entitled to close the building), is likely to take many months because of the current strain the civil courts are under.
“Does the current crisis amount to a force majeure?”
Force Majeure is a contractual provision which allows the parties to suspend their obligations under the lease (and sometimes to terminate it) on account of an event occurring which was outside of the parties control.
However, most tenants will be unable to rely on this provision on account of the pandemic, as most leases will not contain a force majeure clause and case law shows it is unlikely that the Court will imply one into a lease.
If a lease does contain a force majeure clause, the circumstances when it will apply, and the impact and consequences of its application will be clearly defined in the lease. Therefore, whether it could be relied upon by a landlord or a tenant will depend on the drafting of the clause and whether pandemics are expressly specified or could be inferred as being included.
“Does the current crisis amount to a frustration of the lease?”
Where a serious event occurs, which is both unexpected (so that any contractual force majeure provisions do not cover it) and beyond the control of the parties, which makes the lease either impossible to perform or radically different from the parties expectations, the lease could be frustrated.
If there was a finding of frustration of the lease, the parties would be released from their obligations under it.
However, the Courts have set an extremely high threshold to find a lease has been frustrated, and it is highly doubtful that the Courts would find performance of commercial leases to have been frustrated by the pandemic.
“How will the pandemic affect my upcoming rent review?”
The date on which rent is reviewed and the mechanism by which the new rent is calculated will be set out in the lease. Rent is usually reviewed in line with the Retail Price Index (RPI) or based on the Open-Market Value.
Due to the current economic situation (on whichever method is used), the rent will likely result in a marginal increase (if any) as the premises are likely to be worth considerably less than previously on the open market and the Bank of England base rate is now 0.1%.
An argument that the premises is worthless on the basis the tenant is currently unable to trade from it will not be a credible one. The Lease will usually contain a provision that rent reviews are “upwards only” making a reduction in right unlikely.
Tenants could use offering to delay their upcoming rent review as a bargaining chip for agreeing a reduced/deferred rent with their landlord.
For help with any of the issues above, please contact a member of the Litigation team.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.