Posted Monday 16th March 2020
In these uncertain times, many businesses are already experiencing hardship and difficulties due to the effects of the COVID-19 virus that will only increase over the coming weeks as the current situation unfolds. It is important for tenants to obtain legal advice on the implications of non-payment of rent and temporary cessation, or loss, of trading. This article considers, in particular, points that commercial tenants should be considering.
Tenants of commercial premises should consider the following:
A well-drafted commercial lease will provide for the suspension of payment of the rent in certain circumstances. However, these provisions will typically only bite in circumstances where actual physical damage has been caused to a property. All tenants should carefully examine their leases to check the grounds that may trigger rent suspension.
In rare circumstances, a lease of commercial property may contain a clause envisaging a force majeure event. While unlikely that these would be applicable unless the government enforced a full shutdown of premises as part of a wider quarantine exercise, again, leases should be checked to see if they contain anything that can be relied upon.
When the doctrine of frustration applies to a contract, that contract can brought to an end entirely, ending all future liability for the parties to that contract. Could a lease be frustrated because an event has resulted in a significant change in the parties’ rights under the lease from those that were reasonably anticipated at the outset? While each case would be taken on its merits, it seems unlikely that courts would accept that a lease has been frustrated by the impact of the COVID-19 virus.
A typical lease will oblige a landlord to afford its tenant quiet enjoyment of a property. In the event that a landlord took a unilateral decision to close business premises, there may be an argument that it had acted in breach of its obligation, depending on the reasonableness of the actions taken.
Subject to statutory limitations, leases will typically provide that landlords may forfeit (i.e. re-enter a property and bring a lease to an immediate end) in circumstances such as:
These lease provisions are of great concern to tenants, whose cash flow and income are likely to be affected by the coronavirus.
Our advice to tenant clients is to open discussions with their landlords at an early juncture and to engage in full and frank dialogue. Landlords will not wish to forfeit leases unless absolutely necessary. The market is likely to be depressed for a time and landlords will generally not wish to have a void (empty) unit for which they are receiving no rental income while remaining liable to pay business rates. Whilst not obliged to do so, certain landlords may be amenable to negotiating rent concessions or suspensions for a short period of time.
Many leases of retail property, in particular, will contain clauses obliging tenants to keep the premises open for trade during prescribed hours. It is unlikely that a tenant taking genuinely reasonable action to close premises as a result of the COVID-19 virus would be held by a court to be in breach of these provisions and therefore open to forfeiture of their lease but tenants should seek urgent legal advice before doing so.
Tenants should, without delay:
At Joelson, we are happy to speak to both existing and new clients requiring assistance. Please contact the following for advice:
Check the terms of any Business Interruption insurance policy, or speak to their insurance broker about the same.
Investigate the measures being introduced by the government to assist SMEs to minimize the effects of the COVID-19 virus.
A useful article summarizing measures introduced in the recent budget can be found at: www.ft.com/content/ff00ec96-6481-11ea-b3f3-fe4680ea68b5
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
