Recent weeks have seen massive uncertainty across near enough all business sectors, nowhere more so than in the Retail & Leisure sector. An issue that has been well publicised throughout the press is tenant’s obligations on their lease – with many seeking breaks and rent reductions/holidays as the impact of Covid-19, and particularly the ongoing lockdown, on property assets has become apparent. Some common Questions & Answers below.
Can a tenant adversely affected by Coronavirus terminate their lease?
Essentially the answer is no – the only likely exception in this case would be if their lease contained a rolling break clause. Commercial leases generally don’t contain force majeure clauses.
Can a tenant withdraw from an exchanged Agreement for Lease?
This will depend on the provisions and clauses within the Agreement for Lease (AFL). We will likely see Coronavirus Clauses becoming more common within legal documents. Standard force majeure clauses usually refer to events such as terrorist attacks, wars, acts of God and do not apply here.
A possible reason for a tenant to withdraw would be on a conditional AFL, with the landlord unable to satisfy certain conditions – for instance delay to Practical Completion (PC) due to issues resulting from Covid-19.
Can a tenant withhold rent or pay a reduced amount due to the financial implications of Covid-19?
The simple answer is no, the tenant is not automatically entitled to such benefits. Rent suspension provisions (common in most leases) don’t apply here as they relate to damage to the premises by insured/uninsured risks. However, Landlords are encouraged to be sympathetic during this time.
Covid-19 may lead to CVA’s for tenants, which involves negotiation with all of their creditors, including landlords. A rent holiday can mean a number of outcomes and the tenant is unlikely to be fully released from their payment obligation. It is more likely that a negotiations will result in a deferral/repayment programme. It is advised that these are documented by a solicitor.
Does a tenant have to continue paying Business Rates?
Under a lease the tenant is usually responsible for Business Rates. There have been government initiatives and concessions to assist them, particularly in Retail & Leisure. During a lease, Business Rates are an arrangement between the tenant and Local Authority, not the landlord.
Whose responsibility is it to manage the virus within a let premise?
The tenant as they will have a covenant within their lease to comply with all acts of parliament, by-laws and regulations; including health and safety of all customers employees and visitors. However, it should be noted of the difference between leases of whole and leases of part. It can get more complicated when common parts are a factor – e.g. within multi-let office buildings and shopping centres.
How are tenants with a Keep Open covenant being affected?
Whilst many leases in the retail sector contain these Keep Open clauses (e.g. shopping centres or with anchor tenants), in ‘normal’ circumstances these are not usually enforced. Courts are typically reluctant to implement Keep Open clauses and you would expect implementation to be even less likely in the current climate.
Are there any risks to landlords here?
Potentially. In theory, the tenant could make a case that the recent closures mean that the landlord would be liable for damages under a lease under derogation from grant – e.g. breach of quiet enjoyment of the premises or loss of profits. Again, if such claims are brought forward, you would imagine the courts would be reluctant to award damages in this climate.
As is often the case with landlord and tenant relationships, it is a question of who bears the loss? Whilst a lot of press has been about landlords being sympathetic to tenants, they rely on their rental income for many reasons – to pay borrowings, loans, staff etc. Some landlords can have as much to be concerned about as tenants and a collaborative approach is likely to be key here. It is going to be crucial to look at negotiation rather than litigation between landlords and tenants.
To discuss commercial leases and any other queries arising as a result of the current situation, please contact Will Primrose or James Clark in the Retail & Leisure Team at Rapleys.