COVID-19 is the latest event of the 21st century to force a change in daily life, requiring us to be creative and innovative in our ways of work. As businesses are adapting to employees working from home, some companies are not afforded such luxury. These range from small businesses such as bars and restaurants to larger retailers, who have been forced into closing the doors of their establishment in an attempt to curtail the spread of this pandemic. As a result, revenue has been halted but fixed costs remain an expense which companies still need to address. Besides from employee costs, rent remains to be one of the biggest expenses a company may have, however, what can a tenant do about their lease if they have been forced to close the doors of their establishment?
Most commercial leases require the tenant to comply with all statues and notices served upon them by the competent authorities. This means that if the government has required a tenant to close their premises, they must action that request. If a tenant were to remain open, they would be found in breach of their obligation or covenant and could be liable for damages.
As a business is forced to close their doors, one may assume consequentially that they will not need to pay their rent. Generally, most leases do not allow tenants to simply not pay their rent regardless of the circumstances. By doing this, a tenant is running the risk of what is known as forfeiture – where a landlord ends the lease by peacefully re-entering the premises, taking back possession and changing the locks. However, as a result of the global pandemic, the UK Government has introduced the suspension of a landlord’s ability to take forfeiture action against tenants of commercial leases who cannot pay their rent. This would mean that no business can be forced out of their premises if they miss a payment of rent in the next three months (ending 30 June 2020), although this end date could be extended by the government.
Furthermore, most leases do not contain a force majeure clause – which would allow a party to end the lease. Although, another option would be to consider the doctrine of frustration to see if the necessary circumstances have arisen in order to end the lease, traditionally the courts tend to be reluctant to invoke this doctrine. It is unlikely that we will see a shift in their stance owing to COVID-19 as this is considered to be a temporary pandemic and “normality” should resume once it has passed by.
On the other hand, tenants can look towards insurance policies. In most cases, tenants will be paying an insurance premium to landlords covering them for certain risks. Usually, a tenant will be able to request a copy of the insurance policy to check their position. The policy will have to be broad enough to cover risks brought on by a pandemic. It will be unlikely that an insurance policy will be directly worded to cover “pandemics” though the terms of each policy must be analysed. Perhaps interruption to business activity is a risk that could be covered, though this may only relate to physical damage.
Nevertheless, it may be useful to consider entering into voluntary agreements over rental payments with the landlord (known as rent concessions). It may be an idea to approach your landlord with a proposal for sharing the rental risk and reaching a voluntary agreement on rental payments. Although there is no legal obligation for landlords to enter into such agreements, it may be in their best interest to come to an arrangement with their tenant. On one hand, government legislation has suspended a landlord’s right to forfeiture for the non-payment of rent for 3 months. This means that a landlord will be without income for 3 months.
On the other hand, it would benefit a business to reach an agreement with the landlord on a reduced rental payment for the duration of the pandemic. As the right of forfeiture is suspended for the next 3 months, it may be reinstated at the end of this period, at which point the tenant will be liable to pay the accumulated amount of outstanding rental payment. By reaching a voluntary rental agreement, a business will still make a contribution to their rental payments in a lower amount, reducing or even cancelling future outstanding rental payment that could be due.
Finally, there may be a range of different solutions that can be explored by a tenant in such a dynamic and ever-changing environment. Each commercial lease is individual with a range of different stipulated terms. However, this article is not intended to be all encompassing: nor does it constitute legal advice. Please get in touch with us if you require more specific advice on any query, whether on real estate matters or any wider business issues. We have a dedicated team addressing enquiries for our real estate clients.