The World Health Organisation has now declared the COVID-19 outbreak to be a pandemic. The UK government’s plans have moved to the “delay” stage, encouraging self-isolation for those with flu-like symptoms. The government has the power, if necessary, to make orders or legislation to implement further and more restrictive controls to attempt to limit the spread of coronavirus. Many businesses are already preparing for their employees to work from home, should that become necessary.
This article looks at some of the potential issues for commercial landlords and tenants if the measures taken in response to the coronavirus outbreak prevent a commercial tenant being able to occupy the premises they have leased. The advice on these issues will vary depending on the rapidly developing guidance in relation to COVID-19 and the specific terms of the commercial lease.
Could Coronavirus Terminate a Commercial Lease?
Force majeure clauses allow parties to be released from their obligations and bring agreements to an end if certain events outside of the parties’ control occur, for example a natural disaster or terrorist attack. A pandemic could be considered a force majeure event depending on the terms of the force majeure clause. However, it is unusual to see force majeure clauses in leases.
The doctrine of frustration operates in a similar manner when force majeure clauses are not available. The doctrine of frustration can bring a lease to end if an event occurs which is fundamental to the terms of the lease, making it impossible to perform the lease or the obligations in the lease radically different to what was originally agreed, and the event is not the fault of either party to the lease. Frustration is a very high bar to meet and there have been no reported cases in England where a lease has been frustrated.
Therefore, it is likely that commercial leases will continue regardless of coronavirus measures preventing tenants occupying their premises.
What if there is a Keep Open Covenant in the Lease?
It is not uncommon to see covenants in commercial leases of retail premises that require a tenant to keep the premises open and trading. If the government were to require businesses to close as part of the measures to limit to spread of coronavirus, complying with these measures would put commercial tenants in breach of their keep open covenants and, in theory, allow landlords to make a claim against them. However, such a claim is an unattractive option for a landlord.
In England and Wales, if a landlord makes a claim for breach of a keep open covenant it is very unlikely that they would be able to obtain an injunction to force the tenant to remain open and trading. A landlord may consider a claim for damages. However, damages would be assessed based on the loss the landlord has suffered. If the tenant is still paying rent then it is difficult for the landlord to prove any loss, unless the rent is linked to the tenant’s turnover.
Also, leases typically including clauses requiring tenants to comply with legislation and this would create a conflict within the lease. We would expect a Court to determine that complying with legislation takes precedence over complying with other provisions in the lease.
Will Commercial Tenants be protected by Insurance?
It is always important for tenants to check their insurance policies to see whether they offer any cover. Business interruption insurance protects against lost income when a business cannot open. However, the extent of the cover will be strictly defined within the terms of the policy and in many cases policies are unlikely to cover the impact of coronavirus. Business interruption insurance often only provides cover against property damage. There are options which insure against loss from broader causes, such as pandemics, but it will depend heavily on the terms of the individual policy. For example the terms may list certain diseases which covered by the policy and exclude others.
Will Commercial Tenants still have to pay rent?
If a tenant is prevented from running their business due to measures imposed as a result of coronavirus, it is most likely that they will still be required to pay their rent. This will, of course, depend on the terms of the lease, but it is unusual to see any provision allowing a tenant to withhold rent.
Conclusion
The situation with regards to coronavirus is constantly developing and changing. It is essential to stay up to date on and follow the latest government guidance. It is also important to keep in mind the terms of your lease and how they may be affected by coronavirus measures. Our specialist property litigation team is able to provide further specific advice on these issues.