184: How does COVID-19 affect commercial leases? Top tips for landlords and tenants
The current situation with coronavirus raises important questions for both landlords and tenants of commercial premises.
In each case, it depends on the terms of the individual lease and you should seek advice from a solicitor on specific questions. However, here are some general answers to ‘Frequently Asked Questions’ on commercial leases that may help you navigate your way in the current climate:
FAQS for landlords
Do I have to offer my tenant a rent concession?
No, it is entirely within your discretion whether you agree to your tenant paying reduced rent, having a rent holiday or paying monthly. Generally, the tenant has to continue to pay rent under the lease and rent is not suspended due to coronavirus. It is entirely up to you how you act, and such unprecedented times may call for you to make difficult decisions.
If you do decide you are willing to offer a rent concession then you should document any such agreement in a side letter which sets out the changes and for how long it will last as a temporary arrangement. Your tenant may ask for a deed of variation which is a permanent change to the lease, but a side letter is preferable for landlords.
Can I say the obligations in the lease are suspended due to force majeure?
No. Most leases do not contain provisions allowing suspension or termination due to ‘force majeure’ circumstances i.e. the happening of an event outside the control of the parties such as a natural disaster. Generally, leases will continue and the parties must continue to carry out the obligations contained in them.
Do I have to keep my building open for tenants?
Unless and until the government imposes statutory regulations requiring premises to close, you are likely to be required to keep your building open for tenants. If you shut the building now, there could be issues related to breach of the quiet enjoyment covenant or non-derogation from grant.
If there has been a case of COVID-19 in the building, you should be able to restrict access to the common parts as you will be acting reasonably. The majority of commercial leases permit a landlord to restrict access to common parts of its building in an emergency.
In these circumstances, the building may have to close as tenants would not be able to access the premises. Landlords are generally allowed to suspend provision of services if the building has to shut in an emergency and the service charge would be reduced accordingly.
Can I enforce a keep open covenant?
Keep open covenants are common in retail leases. If a tenant decides to shut its premises then it will be in breach of any keep open covenant. However, keep open covenants are difficult to enforce and the usual remedy of damages will be difficult to quantify unless the tenant is paying a turnover rent, where the landlord can establish the loss of turnover for the days on which the tenant is closed.
Case law states that forfeiture, or an injunction preventing closure, are not suitable remedies for breach of a keep open covenant. Landlords may not able to enforce such a covenant if the tenant closes its business but continues to pay rent.
In the event that government regulation forces closure of premises, the covenant for tenants to comply with statutory regulations will be likely to take precedence over a keep open covenant.
Who will pay for the extra cleaning costs at my building?
A tenant is likely to be required to pay for extra cleaning costs through the service charge. Most commercial leases have a general sweeper clause that allows a landlord to recover all reasonable costs through the service charge and this is likely to cover an extra cleaning costs.
FAQs for tenants
Do I have to continue to pay rent if my building is closed?
Yes, generally you will need to carry on paying rent even if your building shuts. If the building closes due to an outbreak of COVID-19 then your landlord will be acting reasonably if it shuts the common parts which prevents access to your premises.
However, if your landlord decides to shut just because it wants to, your landlord may be in breach of its covenant to allow you quiet enjoyment of the premises. You may be able to argue that this renders the property unfit for purpose (as you cannot access it) and materially affects your ability to use and enjoy the property. You should get in touch with your landlord through your solicitor to find out why the building cannot remain open.
Even if the government passes regulations stating that buildings have to shut, you will also still have to continue paying rent. You should ask your landlord if you can have a rent holiday, pay reduced rent or pay monthly. The landlord does not have to agree to this, but it is worth starting a dialogue early as landlords may be more likely to agree to a rent concessions in the current climate.
If your landlord does agree a rent concession you must make sure this is documented in a deed of variation or side letter. A deed of variation is preferable a tenant because it is a permanent change to your lease, but a side letter is also acceptable as a temporary amendment.
Can I temporarily stop paying rent under the rent suspension clause?
No, most leases provide for rent to be suspended if the property is damaged by an insured risk (and sometimes by an uninsured risk), but are unlikely to include wording suspending the rent in the eventuality that they are not permitted to open due to the government requiring premises to close.
You should check your business interruption insurance to see whether you might be covered for any rent you have to pay whilst the premises are closed. However, it may be that some insurers determine that closure due to COVID-19 is a ‘force majeure’ event and therefore will not cover this loss.
Again you should contact your landlord and ask for a rent holiday, reduced rent or to pay monthly. It is up to your landlord to decide whether or not to agree to this but it is definitely worth starting a dialogue.
Will my landlord enforce the keep open covenant in my lease?
You need to check to see if there is obligation on you to keep your premises open during normal trading hours. Some landlords may agree carve outs to this keep open provision whereby the tenant is not on the hook to open in certain circumstances (for example where obliged to close due to government legislation). You might want to ask your landlord to agree to add this in a side letter or deed of variation.
Recent case law means that landlords are unlikely to be able to force a tenant to open even where the lease contains a keep open clause. However, a landlord does still have the ability to claim damages for breach of contract. If you are renegotiating rent concession with a landlord it may be prudent to also agree that any keep open provision (and related penalty) will not apply during any forced closure due to COVID-19.
Can I choose to close my premises as tenant?
Most leases do not oblige tenants to remain in physical occupation and trade from their premises. In the absence of a keep-open clause, you don’t have to stay open for business as long as you carry on paying the rent.
As mentioned above, you will have to stay open if you have a keep open clause in your lease. However, if the government passes regulations forcing premises to close then you would have to shut in accordance with the usual tenant’s covenant to comply with statutory requirements. This may take precedence over a keep open clause.
Will I remain liable to pay for the provision of services at my premises?
Yes tenants must continue to pay service charge and landlords will remain liable to provide services to properties where the leases include service charge provisions.
If a landlord needs to provide more intensive services such as deep cleaning or extra soap the additional costs are likely to be recoverable under the service charge provisions as reasonable costs.