COVID-19 Commercial Lease Implications
How does COVID-19 affect my commercial lease?
COVID-19 has already impacted various companies and businesses. Commercial Landlords and Tenants are no different especially as cinemas, theatres, bars, pubs, restaurants, and clubs have been required to close.
During this testing time both commercial Landlords and Tenants will want to know what rights they have. Should Tenants expect to pay rents when their business is closed? Can Landlords rely on forfeiture provisions within their lease if a Tenant fails to pay rent?
Please find our guidance for both commercial Landlords and Tenants below:
If a commercial Tenant cannot run their business due to the impact of COVID-19 and subsequently cannot pay rent, then they are offered protection by the emergency Coronavirus Act 2020 (passed on 25th March 2020). Tenants are currently offered protection until 30th June 2020. This may be extended further if restrictions are still in place by this date. The government will be providing ongoing guidance during this pandemic and this may be set to change.
Whilst commercial Tenants are being offered protection, it is important to note that the rent will still be payable. Although commercial Tenants are protected from eviction, it is not to be confused that this a right not to pay rent. This rent will likely be collected once the restrictions have lifted. It is important that Commercial Tenants should review their Lease and look out for the following:
1) Does the commercial Lease have a Force Majeure clause? Force Majeure clauses account for situations where due to unforeseen circumstances a contract cannot be fulfilled. Whilst it is expected that COVID-19 will count as Force Majeure, these clauses are not common in leases. Even if they are within a lease they often tailor for specific events. Have a review of the Lease and see whether this clause has been included. If this clause cannot be found in the lease, then theoretically the doctrine of frustration may be relied upon. The doctrine allows for an individual to be released from their liability when they are prevented from performing their obligations. However, it is important to note that there is no certainty that this will be successful.
2) Is there a break clause? If so, when is the break? It is important that commercial Tenants review the contents of their lease and see whether they have an imminent break. If a commercial Tenant wishes to terminate their lease and relies on their break clause it is important to see whether the lease imposes any requirements – such as will the break notice need to be served in a specified manner? Will the Tenant have to give a certain amount of notice?
Commercial Tenants should look to open dialogue with their Landlords and try to negotiate temporary terms until restrictions are lifted.
Landlords will not be able to evict Tenants for failure to pay rent, if their business is affected by COVID-19, but practically speaking Landlords should look to offer commercial Tenants flexibility during this testing time.
Tenants are still obliged to pay rents albeit once restrictions are lifted. But from a commercial Landlord’s perspective it serves their interest if the commercial Tenant’s business is a success. Once the governments restrictions are lifted the commercial Landlord will be able to create a passive income once the commercial Tenants business recovers. A Landlord should be mindful of trying to re-market a commercial premise during this period as agents are currently not offering viewings to keep in line with social distancing measures advised by the government. There also may be a lack of interest as prospective Tenants will not be able to open a business during COVID-19.
It is worth considering voluntary agreements during the length of the restrictions whether that be a reduced level of rent or a deferral of rent payment. It is advised that any agreements are documented for completeness.
It would be wise and advisable for both Tenants and Landlords to work together during this unprecedented time. It serves the interest of both parties to ensure that once restrictions are lifted that businesses can return to normal.
Please note with the changes daily, this article is subject to change.
Should you require any further assistance, please feel free contact Ramnish Sharma of the Commercial Property team on 01530 510666 or via email: email@example.com.