Coronavirus – what it may mean for commercial landlords and tenants
UPDATE | 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.
Now that the Government has closed down the majority of retail, hospitality and leisure business to stop the spread of the virus, landlords and tenants should be aware of the parameters of their leases to see if they can minimise the impact of these necessary restrictions during this challenging period. We take a look at some of the points which you may be considering.
If you’re a tenant
- Reducing your rent
If you’re a tenant and pay a rent in accordance with a turnover clause, then you may see a significant decline in takings for your business if Government restrictions/recommendations affect your footfall. You may expect to see a reduction in the amount of rent that you pay to the landlord at the end of the rental period.
Whether or not this applies will depend on the terms of the turnover rent clause in your lease and whether there are any other lease requirements on the tenant to keep open and maintain active trading throughout the period.
If you pay a fixed sum for rent, you could seek to negotiate a rent concession or rent deferment with your landlord. If your landlord is unwilling to engage with you, then there is the drastic option of withholding payment of the rent, as temporary changes to the law mean that landlords cannot forfeit your lease for at least three months (from March). However, this carries obvious risks including landlords still being able to begin recovery action against a tenant (or a guarantor), even if they are unable to terminate the lease.
- Breach of your quiet enjoyment
You may be the tenant of a multi-let building or a shopping centre. If a landlord is required to close all access to your building then, arguably, the landlord has breached its lease obligation to you to allow quiet enjoyment to your premises as the closure will have been taken without your agreement.
If this is the case, it is worth considering taking steps now to preserve evidence in order to raise this claim for damages against your landlord once any coronavirus restrictions are lifted and you have regained full use of your premises. For example you should track and retain full records of the takings of your business and loss of profit and any other direct costs which you have incurred over the period of closure.
However, tenants are unlikely to succeed with such a claim, given that the current Government guidance is for non-essential businesses to close. Nevertheless, for those that can potentially run a take-away service and adhere to guidelines safely, a discussion can be had with the landlord to keep the premises open. If a landlord is still not willing to permit access, then tenants could consider a claim for breach of the quiet enjoyment provisions.
If you’re a landlord
- Frustration of the lease
Landlords are likely to face claims by some tenants that they cannot survive as a business even for a short period of a few months without full access to and use of their premises. Those tenants may even try to argue that their lease should now be brought to an end altogether as a result of the footfall restrictions resulting from any spread of COVID-19.
It is extremely difficult to argue that a lease has been frustrated due to external influences in this way, as the case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency  highlighted. In this case, the European Medicines Agency failed to persuade the Court that Brexit as an event was capable of “frustrating” the purposes of the lease. Landlords should take some comfort therefore that similar principles ought to apply to COVID-19 and should be ready to resist any challenges by their tenants on this basis.
Tenants may seek to invoke rent suspension clauses in their lease if they can show that a connection between COVID-19 and the typical insurance provisions in their lease. Landlords should be able to resist these claims by reference if they can show that COVID-19 does not fall within the definition of Insured Risks in the lease.
Likewise, standard Uninsured/Insured Risk provisions require there to be destruction/damage to the premises. It could be considered stretching the argument too much to say that the requirement to decontaminate/deep clean premises is sufficient to classify premises as damaged property. In light of the above, it is unlikely that the rent suspension provisions will apply.
As ever, the extent to which you may be able to invoke any of the above – whether you are a landlord or tenant – will depend on the precise terms of your lease and how those provisions can be interpreted in the circumstances.
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