As published in CoStar on 22 April 2020.
Will Primrose, Senior Surveyor in the Retail & Leisure Group at Rapleys, looks at the rights and obligations.
Recent weeks have seen massive uncertainty across near enough all business sectors as a result of the Coronavirus, and the Government recently announced a further three-week extension to the lockdown. The majority of retail and leisure occupiers are suffering from a complete suspension of trade and many landlords have announced breaks, rent reductions or rent holidays to aid them during this period. Many operators will have questions regarding their rights and obligations during this unprecedented crisis. Will Primrose, Senior Surveyor in the Retail & Leisure Group at Rapleys addresses some of these key questions.
Can a tenant adversely affected by Coronavirus terminate their lease?
Essentially the answer is no – the only exception in this case would likely be if their lease contained a rolling break clause. Commercial leases generally don’t contain force majeure clauses. The only common factor that would change this is if the tenant went into liquidation.
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. However, we are seeing Pandemic Clauses become more prevalent. A possible reason for a tenant to withdraw would be on a conditional AFL, with the landlord unable to satisfy certain conditions – for instance delivering a scheme before a long stop date 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 negotiation will result in a deferral / repayment programme. It is advised that these are documented by a solicitor.
Can a landlord evict a tenant for non-payment of rent?
We are now seeing these unfortunate issues coming to the press following the March quarter day. The Coronavirus Act 2020 introduced last month banned forfeiture until 30 June 2020 – or longer if the government deems necessary – for non-payment of rent. However, at the time of reporting they do not prevent landlords from taking steps to force tenants to pay rent withheld because of the lockdown and a number have decided to pursue statutory demand notices and Commercial Rent Arrears Recovery (CRAR). This can be catastrophic for a tenant with little or no income. Whilst many tenants are having open and constructive discussions with their landlords during this difficult, period, others are in danger of receiving statutory demand notices or winding up orders.
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 – especially with the aforementioned Government protection for tenants affected by COVID-19.
What are some of the Landlord’s obligations in this situation?
A key obligation will be to comply with Government guidelines which will likely fall within their service charge and estates obligations – a situation that has escalated quickly in the last few weeks. In conjunction with Government guidelines, what started as an obligation to provide enhanced hygiene / sanitising products has become full premises closures. Costs for measures such as deep cleaning, hand sanitisers and other items are usually recoverable for the landlord through the service charge.
Any potential risks to a landlord 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 with the Government’s lockdown and social distancing guidelines as the backdrop.
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. We are now seeing figures published which emphasise the drop in rents that some landlords are receiving and many have as much to be concerned about as tenants. A collaborative approach that focuses more on open discussions and negotiation rather than litigation is going to be key here.