COVID 19 | Business leases

COVID 19 | Business leases

Landlord and tenants are paying close attention to how the continuing spread of coronavirus over the coming months may affect their leased premises. Landlords and tenants should be aware of the parameters of their leases to see if they can minimise the impact of necessary restrictions on their businesses.

The impact and the risks will differ if you’re a landlord or tenant so we’ll look at issues relating to both such as service charge, security, insurance, force majeure, frustration, breach of quiet enjoyment etc, and how some of the lease provisions could help/hinder these.

Further information on how to manage the impact of coronavirus can also be found on our coronavirus resource hub and you can view past webinars at SHMA®ON DEMAND.

Please do let us know of future topics that you are interested in, or for more information about our webinars please contact us.

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Webinar transcript

(Please note this is auto-generated and un-edited)

Hello and welcome. I'm Justine ball a legal director here at Shakespeare Martineau and welcome to today's webinar on the impact of coronavirus on business leases. You will see on your screen that you are able to ask questions. So, please do get in touch along the way and I can answer as many as I can at the end.
Many landlords and tenants will be paying close attention to how the continuing spread of coronavirus over the coming months may affect their business and in particular their leased premises in the wake of the 2020 budget and the World Health Organization now declaring the coronavirus as a pandemic we can expect the government to introduce recommendations and restrictions to now delay the spread of the virus.
Knowing the parameters of your lease and good planning may help minimize the impact of any restrictions or recommendations imposed by the government. So today we will explore some of the concerns you may have as landlords and tenants.
So starting with tenants all businesses are likely to feel the effects of the virus travel and Leisure are being hard hit as a result of countries seeking to contain the outbreak with flight cancellations travel bans and tourist hotspots being closed businesses with office premises will also be affected as employees may need to work remotely which may put pressure on production levels.
As businesses start to feel the downward effects of the virus. You will be considering how you can support the payment of rent and other sums under your lease. So tenants will be considering whether there is any entitlement to a rent holiday are in suspension or rent reduction as a result of the sudden effects of the virus.
Unfortunately, this is very unlikely to be the case tenants will be unable to unilaterally withhold rent. However, you could seek to reach a negotiated position with your landlord tenant could seek to liaise with their landlords to explain and evidence the effects of the virus on their business to explore whether the landlords would be willing to agree a rent reduction rent holiday or even a payment plan. So rent can be broken down into more manageable payments.
However this It would be entirely at the landlord's discretion.
Another way of trying to get rent covered is through insurance. If you have insurance, you should review your policies to consider whether the effects of the virus could be covered the type of insurance you need to look for is business Interruption insurance. If you have a policy which includes business Interruption, you will also need to look at whether such insurance covers property damage only whether it also includes non property damage.
The latter is more unusual, but policies should nevertheless be checked as tenants may be able to claim rent. It is unable to pay as well as other losses if it has business Interruption Insurance, there may be a way for tenants to pay a reduced rent, but this will only be the case if tenants pay a turnover rent.
So if you pay a rent in accordance with a turnover Clause, then you may expect a reduction in the amount of turnover rent you pay if you see a decline in your taking Tenants will be contractually obliged to pay the base rent in accordance with the turnover rent Provisions, but tenants could see a reduction in the amount of additional turnover rent paid to the landlord at the end of the rental period as this is usually calculated on the basis of a business's turnover.
Whilst this won't result in an immediate rent reduction. There may be some relief for tenants at the end of the rental period which may be welcome. If businesses have been struggling up to that point whether or not a turnover Clause will apply will depend on the terms of the provision in your lease and whether there are any other lease requirements on the tenant to keep open and maintain active trading throughout the period this is usually a condition of some turnover rent provisions.
But also need to consider whether any forced cessation of trading would be affected on a slightly separate note. If it is the case that you consider that you're unable to trade at all from the premises check your lease for a tenant break laws whilst this will not result in you being able to immediately cease paying rent. Once you have served the break notice and any break conditions have been met and the number of months notice have expired you would then escaped the liability to pay.
Rent for the remainder of the term. But of course you would still have any dilapidation liabilities to consider.
So moving on you, maybe the tenant of the Morty let building or a shopping center If a landlord closes the center then arguably the landlord has breached its lease obligations to you to not derogate from Grant and to allow you to quietly. Enjoy the premises.
The strength of this argument will depend on the circumstances around the closure if the landlord has unilaterally decided to close the building and no such guidance has been issued by health and safety executive Public Health England or the government then your claim is likely to be stronger.
However, if the landlord is following guidance from regulatory bodies all the government, then it may be more difficult to make that claim.
In any event tenants should take steps now to preserve evidence in order to raise any claim for damages against landlords as necessary at a later date.
For example, you should track and retain full records of the takings of your business loss of profits footfall and any other direct costs, which you have incurred over the affected period tenants can then seek to use this information to try and negotiate a rent suspension of rent reduction or rent holiday as well as other songs you pay The nice if the landlord isn't willing to agree a reasonable soon as I set off you can then assess your position with the available evidence. You have collected and consider at that point whether it is necessary to threaten a breach of quiet enjoyment claim. So thirdly if it becomes necessary for tenants to close their business premises, they will need to consider whether this will be a breach of Covenant in their lease to keep trading and to keep the premises open.
This is likely to be a major cause of dispute between landlords and tenants particularly since a keep open Clause can be linked turnover rents and breach of that covenant could result in forfeiture of the lease a damages claim being brought against you or a claim to force a tenant to reopen its business.
However, it is extremely difficult for a landlord to succeed in forcing a tenant to reopen its business. Should it choose to close the same this would be even more difficult to achieve if tenants have closed businesses because of government and Regulatory bodies guidance.
If you are looking to close the business temporarily for other reasons, these should be explained in detail to the landlord before closure. If possible. In order in order that you can then seek to reach an agreed position on the period of closure with the landlord to try and avoid any potential action from them. So now turning to landlords.
Landlords are likely to face claims by some tenants that they cannot survive as a business without full access to and use of their premises and an adequate number of Staff tenants May. Therefore try to argue that their leash should be brought to an end all together as a result of the football restrictions reductions in takings and the effects to supply chains as a result of the virus.
So on that basis tenants could seek to argue that their lease has been frustrated by the outbreak of the virus.
However, it is extremely difficult to argue that Elise has been frustrated as the case of Canary Wharf The p41 Limited versus European medicines agency highlights in 2019. In this case. The tenant European medicines agency failed to persuade the court that brexit was an event capable of frustrating the purposes of the lease. The bar has been set very high by the court and tenants are unlikely to be able to successfully argue that their leashes should be.
Brought to an end by frustration due to the virus given that it is transient and temporary in nature the frustration to be a credible argument tenants would arguably need to prove longer-term and significantly damaging effects of the virus on the premises and their businesses.
They must prove either that it is impossible for them to perform their obligations as a result of the virus or their obligations are drastically different than was first envisaged tenants could could be assisted by any guidance from the government that must be followed. However, even this may not be sufficient as arguably the outbreak of public disease is within the contemplation of the parties given previous events.
Landlords should therefore be ready to resist any challenges by their tenants on this basis.
I'll also slightly touch upon force majeure Clauses which are well known in commercial and construction contracts. However, they are rarely found in commercial leases. Although granted.
Some older leases may contain these If there is a force majeure clause in your lease whether the virus can be seated as force majeure event will depend on the wording of the Clause. However disease such as a pandemic is unlikely to be considered as a specific act or event given its evolving nature nevertheless. If there are government impose restrictions that may give rise to an event such as a quarantine and a lockdown. It may well fall within the force majeure provisions and the lease could be brought to an end.
Only if it contains such a provision. So moving on to insurance with the mounting pressure on tenants being required to pay out various sums tax rates utilities with the reduced some coming into their business. They may seek to invoke the rent suspension clause in their lease.
Standard uninsured and insured risk provisions of unlikely to cover losses as a result of the effect of the virus.
It is worth considering though, whether the possible consequences of disease such as civil commotion would be caught by insured or uninsured risks. You must check your lease.
In particular rent suspension is only likely to occur where an uninsured risk has caused damaged or has destroyed the premises the virus is unlikely to cause such physical damage, but we can query where the contamination of the premises by the virus could equate to damage particularly since premises are likely to be shut while the damage has been remedied.
It is worth checking your risk Provisions as depending on the drafting. It may well extend to premises that have been closed and not just being damaged or destroyed.
But looking at standard uninsured and insured risk Clauses that you see in modern laces. It is unlikely to include such caveats and on balance. It's unlikely that tenants will be able to rely on those Provisions for rent suspension. So looking at service charge now as the government is looking to step up its efforts to delay the spread of the virus. It is likely that we will see the government imposing requirements for building owners or landlords or even tenants to undertake extra cleaning services.
Has and deep cleaning of their premises whilst there is unlikely to be any explicit obligation in your lease to require you to provide additional services to prevent disease any in positions by the government will need to be undertaken quickly.
Supplying these additional services will come at a cost and depending on the wording of your service charge Claus. It is likely that you will be able to recover the cost of any additional cleaning from your tenants. Therefore you should give notice to your tenants of the additional cleaning and maintenance required and recharge this to them in the usual way the provisions you should look out for which would cover these costs are any relating to hygiene management and cleaning security and the general Provisions allowing.
Free of costs in line with the principles of good Estate Management, which is usually a sweep up clause.
It is also often a provision which requires costs to be incurred reasonably, but in the circumstances, it appears unlikely that tenants could argue that the provision of additional security or additional cleaning could be unreasonable in these circumstances. We've also had a number of queries as to where the landlord should improve controls of access to premises such as forcing visitors to utilize hand sanitizer.
Services included in the model commercial lease for office premises allows landlords to recover costs for the provision of facilities for visitors of the building. So this would cover eventuality and such costs could be handed down to tenants. So it is key for landlords to check the extent of their service charge Provisions to understand what is and isn't covered.
So the top action points both landlords and tenants need to undertake as the threat of the coronavirus evolves are check your lease Provisions understand your rights and obligations in order that you can formulate a tailored plan for your business.
Keep yourself up to date with guidelines from the government World Health Organization and Regulatory Agencies such as the health and safety executive and public health England. This guidance is key and will help you plan ahead for your business and understand your legal position.
Keep records book for turnover staff absences profits losses supply chain interruptions. This will help justify any action. You may need to take to minimize the impact of the virus. So the more evidence you can collate and keep the better.
Keep your tenants or landlords updated as to the current position of your business. If you feel it necessary communicate the effects of the virus on your business or the plans you wish to take to tackle the same with your landlord or tenant Paper Trails are important.
Also engaging and negotiating with landlords and tenants be willing to engage with them on the issues. You are facing you may find that your landlord or tenant understand your position which could result in a negotiated resolution that benefits both parties. So, how can we help here at Shakespeare Martineau? If you sent offshore lease we can help you understand your rights and obligations. If you are renewing your lease, we can consider what additional protections you should be seeking.
Going to contain there in.
We can also lead you in the right direction as the type of information you should be collating at this time to ensure you are keeping appropriate and necessary records. We can also help you formulate a strategy to cope with the effects of the virus on your business premises and leases.
So thanks to all of you who have joined us today. And listen to this webinar about the impact of coronavirus on business leases. I can see that I've had a few questions come through. So I will answer a couple now, so let's take one for tenants and one for landlords.
So tenants, you've asked me what you should do. If you have to cease trading temporarily due to coronavirus. So as I touched upon earlier on it depends on the circumstances, but if there are no requirements for your business, too close by the government, then you should consider why you are seeking to close the premises and whether it is absolutely necessary to do so.
As mentioned earlier if your lease has a keep open Clause you could be liable for breach of this Covenant.
However, if it is the case that you have no or minimal staff due to self-isolation or you can produce strong evidence that the coronavirus has shut your business and trading then it may be worth liaison your landlord now to confirm the position and state that it is necessary for you to close the premises temporarily you can then try and agree with your landlord a period of closure and request confirmation. The landlord will not bring a claim against you for breach of that Covenant in the circumstances.
And the second question will take from the landlord side. What a my obligations to my tenants in relation to the coronavirus. Do I need to be doing more to look after their care? So landlords will have a duty of care for the health and safety of its tenants as well as visitors contractors and employees and this Duty will include the risks posed by infectious diseases.
You should therefore carefully consider the current threat in light of the most up-to-date news on the outbreak and take into account the following advice. You should obtain health and safety recommendations from your health and safety advisors. You should put in place any further preventative measures that need to be taken in relation to the building itself such as additional cleaning security provision of hand sanitizer Etc.
You should also be Consulting and liaison with your employees about any risks and any measures that they need to take both inside and side of the premises So that concludes the session thank you for listening. And for your questions. I will follow up those. I haven't been able to answer today after the session the next webinar in our coronavirus series is tomorrow at 12:30 on minimizing Financial risks to businesses with Shaun Moran. So if you'd like to get in touch with us, please do so you'll see the details shown up in front of you.
You can call O 3 3 3 0 0 2 4 0 3 3 3 and ask to speak to me or another member of the real estate disputes team or you can visit our coronavirus hub for advice and guidance.

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