First and foremost, it should be borne in mind that any advice arising from the issues relating to COVID-19 are constantly evolving, therefore you should always consult the latest directions from the government, NHS, Public Health England and WHO before taking any action.
The consequences of this new drastic regime whereby people are self-isolating, and businesses are operating remotely are far-reaching. Many are concerned but aren’t sure how to act in the current climate, therefore this article aims to provide some clarity to landlords and tenants in the commercial property sector.
So, what exactly should you be doing and what should you be aware of?
- Deep Clean of the Property
Given the amount of times we have all been told to wash our hands in the last few weeks, it goes without saying that landlords should be conducting a deep clean of their properties. Thankfully, most service charges in a commercial lease provide for the recovery of cleaning costs.
Although the costs of a deep clean will be much greater than conventional cleaning, they should still be covered under the service charge and a tenant will have difficulty in disputing that those costs have been reasonably incurred, given the circumstances.
However, the general cleanliness of the property will ultimately come down to the hygiene of the tenants and their visitors, and the landlord’s own staff. Therefore, it is up to the Landlord to draw up certain measures in order to minimise the potential spread of any virus. Many commercial leases grant the landlord an explicit right to impose reasonable regulations on their tenants, which they would then be obliged to follow. In this regard, Public Health England has issued a best practice guidance on COVID-19 in the workplace; adopting this guidance as policy would be a good starting point.
- Terminating Leases
Sadly, in the absence of government aid, a number of tenants will not be able to pay their rent. Therefore, a number of leaseholders may attempt to walk away from their leases without incurring any costs. The two main arguments a tenant is likely to raise in order to do this are known as force majeure and frustration.
A force majeure clause, generally speaking, allows either party to terminate a contract following an event outside either party’s control, such as a catastrophe or an “act of God”. Force majeure clauses are commonly featured in commercial contracts but are rarely found in leases. In any event, the general consensus is that since COVID-19 is not a single specific act or event it is unlikely to be considered a force majeure event. However, the success of any force majeure argument will depend entirely on the drafting of the clause itself – it will need to be carefully reviewed to determine if situations such as a pandemic are covered.
As for the doctrine of frustration, please feel free to read our previous article concerning whether a lease can be terminated because of Brexit (remember that!) by relying on frustration for a brief explanation. In short, the courts notoriously take a very restrictive approach in relation to claims under this heading, meaning its unlikely to apply. This is further compounded by the fact that there are no reported cases in England where a lease has been held to be frustrated. This is because, from a legal perspective, a lease will still be capable of enjoyment in some form, even if it becomes very difficult for a period.
Landlords should also bear in mind that if the lease contains a Break Clause the tenant may have a right to terminate the lease. Therefore, the wording of any break clause must be reviewed carefully.
- Rent Suspension
In the event that a tenant is unable to terminate their lease they may look towards a rent suspension clause, which is contained in a number of commercial leases. However, rent suspension provisions only tend to bite when the property is actually damaged, meaning that it is unlikely to apply to any COVID-19 scenario. This being said, a clause may well have been drafted to kick in where the premises are inaccessible, regardless of damage to the property, therefore closure of the premises or common parts as a safety precaution from the landlord may trigger the rent suspension clause in certain leases. As always, the specific wording in the lease needs to be reviewed.
Landlords should also bear in mind that Tenants who pay turnover rent will be compensated to a degree by not having to pay a full market rent should their business falter over the coming weeks and months. Tenants, however, should be mindful of any minimum payment clauses, which could still leave them paying a certain amount over and above their turnover at a difficult time.
- Closing the Common Parts
Although we all hope that the situation does not turn critical, landlords should consider that at a certain point they may have to close the common parts as a matter of health and safety. In theory, this could give rise to a claim for derogation from grant, breach of quiet enjoyment or keep open clauses from tenants. However, most leases allow the landlord to suspend access to the common parts in an emergency and the threat of a pandemic is likely to constitute an emergency. Moreover, should the government enforce “lockdown” measures in the future, whereby it will be unlawful to keep the common parts open, this will likely be a sufficient defence to any claim.
- Moving Forward
Commercial lease negotiations in the future will likely focus on the obligations of the parties in an emergency or pandemic scenario in light of COVID-19. Force majeure clauses may begin to creep into commercial leases at the request of tenants, in the hope that they can bring the lease to an end in unforeseen or unprecedented circumstances.
Current tenants are advised to review their existing business interruption insurance in the meantime as they may cover the impacts of an epidemic, although they are usually related to property damage.
Finally, please stay safe, stay informed of the latest advice from credible sources and keep washing those hands!