|As a consequence of the COVID-19 outbreak we are all now living in unprecedented times. Shops selling non-essential goods have been forced to close. People have been instructed to stay at home. So what does this mean for landlords and tenants?
|THE LAW, WHAT YOU’VE HEARD AND WHAT YOUR LEASE SAYS|
Tenants may think that where they are prevented from occupying the property as a result of an event beyond their control, they would be absolved legally from continuing to perform their obligations – they may have heard of the term “Force Majeure”.
The difficulty is that Force Majeure cannot be invoked automatically. There first has to be an express provision in the lease providing for it.
Most leases will not contain such a provision.
Clauses like this are more common in contracts – e.g. an agreement for lease which is conditional on the happening of an event (landlord’s works for example).
This is a legal doctrine that is not dependent on the terms of the lease. Legal frustration may occur where a contract can longer be performed as a result of circumstances which are absolutely fundamental and entirely beyond what was contemplated by the parties at the outset.
The threshold for invoking frustration is very high and the burden of proof is on the party seeking to rely on it. A change of circumstances that simply makes the contract or lease less convenient or economically viable is unlikely to amount to a frustration event.
Indeed there are no reported cases in England where a lease has been held to be frustrated.
In short, it is unlikely that, at present, UK law will recognise the COVID-19 pandemic as a frustration event. This may change depending on the duration of the current crisis, however, any challenge to a lease on the grounds of frustration will be, in effect a test case. This potentially makes it an unpalatable course of action for most tenants.
|Breach of Quiet Enjoyment/ Derogation from Grant
A landlord might decide that it is appropriate to close a shopping centre to avoid the spread of the virus, even though he is not under any legal compulsion to do so. Whilst the landlord might so act with the best of intentions, it opens him to a claim for breaching his lease covenant to allow the tenant quiet enjoyment of the demised premises.
In such circumstances, a tenant might be able to claim from the landlord for its losses.
However, where the landlord’s actions are consequent upon Government advice a tenant may find it difficult to establish such a claim.
There may be specific provisions in a lease providing for rent suspension in circumstances where the premises have been damaged or destroyed by an Insured or Uninsured Risk (as defined in the lease) so as to render the premises unfit for occupation and use.
Most rent suspension clauses will refer to damage or destruction, but, some may come into effect where the premises become inaccessible for any reason.
It is unlikely that COVID-19 will cause damage to or destruction of a premises, but, it may be prudent to check the landlord’s insurance policy to see whether there is any cover at all for this event. If there is, a landlord is more likely to agree to suspend the rent (notwithstanding no actual damage or destruction has occurred) as he will have recourse to the insurers.
|SO, WHAT CAN YOU, AS A TENANT, DO?|
|Exercise a Break Option
You will need to check your lease to see if there is an option to break before the end of the term.
If there is, you will need to check the break date, the notice to be given and the conditions to be satisfied. For example, it is common for break clauses to be conditional on payment of all yearly rent due up to the break date.
If you have paid a rent deposit to the landlord, the landlord may agree to use it to cover the rent you are unable to pay.
Most rent deposit deeds will provide that the tenant is obliged to ‘top-up’ the deposit in these circumstances, so you should consider an agreement with the landlord to top it up at an agreed later date when the COVID-19 crisis has eased and the financial position of the company is expected to have improved.
You may consider requesting that the obligation to pay rent be waived for an agreed period, or suspended for that period with back rent paid over a number of rent payment dates when the crisis ends. Some landlords are also agreeing to reduced rents being paid during the crisis.
However, most leases do not allow the tenant to withhold rent regardless of the circumstances, and so the landlord’s remedies for non-payment of rent (set out below) will arise in these circumstances and approaching your landlord to seek agreement is highly recommended rather than simply failing to make a payment.
If the landlord agrees to your request, it should be documented (i.e. by way of a simple side letter) so as to give both parties certainty as to their obligations and remedies going forward.
|Control cash flow
You could seek an agreement to pay rent monthly, which may enable cash flow to be managed more easily.
The landlord is not obliged to agree, but, if he does, then the arrangement can be quickly and easily documented in a side letter.
|WHAT ARE YOUR REMEDIES IF YOU ARE LANDLORD|
If you hold a rent deposit and your tenant doesn’t pay the rent, you can draw down the deposit.
The rent deposit deed will likely provide that the tenant has to top up the deposit, following your withdrawal, but, bear in mind that your tenant is unlikely to have funds to do so in the short term.
|Pursue a guarantor
If there is a guarantor pursuant to the lease you can pursue for recovery of the debt. That will require court proceedings, however, and so may take time and potentially be costly.
Where there is no dispute as to the amount of the debt you may consider serving a statutory demand, which is a swift remedy and often results in payment where the tenant has the ability pay.
If this remains unpaid after 21 days, and it is more than £750 for commercial tenants, then this may be deemed evidence of inability to pay a debt and therefore gives grounds to present a bankruptcy or winding up petition.
The exercise of commercial rent arrears recovery (CRAR) would allow you to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears. CRAR requires various notices to be served on the tenant by the enforcement agent at each stage of the process and there are a number of regulations with which you must comply.
If this is something you would like to explore, please contact us for further information. Please note, however, that in many cases if you do exercise CRAR there will be a considerable impact on the tenant’s ability to recover following the current crisis.
You may, of course, bring court proceedings to recover the debt but this route does have the potential to be costly and it may take time.
|Forfeit the Lease
You can peaceably re-enter or obtain a court order to forfeit the lease for non-payment of rent.
Be aware, however, that:
As a consequence of the Coronavirus Act 2020, you should also be aware that includes a temporary ban on forfeiture for non-payment of rent until 30 June 2020. This does not constitute a waiver of your right to forfeit, it simply suspends your ability to do so in the immediate term.
|OUR ADVICE THEN…..|
|…if you are a tenant||….if you are a landlord|
|Engage with your landlord as early as possible. Simply not paying the rent with no warning will not be welcome to your landlord, whereas engagement allows the parties to have sensible dialogue to try to agree terms and avoid hostile action.||Be receptive to your tenant’s request and consider each on a case by case basis. Whilst you do have various remedies available to you, not all are particularly attractive, particularly given the current market.|
|Check your business interruption insurance policy!||Check your buildings insurance policy!|
In any case, regardless of your status, check the Government’s guidelines and the support available as these are changing on a daily basis.
The Government has announced various measures designed to help businesses and we would encourage you to carefully consider whether such apply to your business.
Finally, we are all in this together. We hope that you and your employees, members, friends and family remain safe and well during this time of national crisis. We will do our upmost to support during this difficult period and we look forward to working with you all again, to strengthen and expand your businesses, once the situation has improved.