The World Health Organisation has recognised coronavirus (COVID-19) as a pandemic which is causing the UK real estate market to take a hit.
We have considered the practical implications that commercial landlords may face as a result of the outbreak and what they should be doing to protect their position including landlord’s obligations, temporary closure of commercial buildings and tenant’s requirement to continue paying rent.
Can I require my tenant to temporarily vacate the property on government advice?
To date, the government has not recommended closure of the workplace even where a member of staff or member of the public with confirmed COVID-19 has recently been at the property. Public Health England will instead contact the business affected to discuss the circumstances and provide advice. It is likely they will advise on how to best clean communal areas and isolation of any other persons who have potentially been in contact with the infected person.
If the advice of the government changes, most commercial leases will include a clause requiring the tenant to comply with all legislation, notices or orders made by a competent authority. The tenant would therefore be in direct breach of that provision if they fail to comply with any directives published by the government or Public Health England.
Who pays the cost for additional services?
Undertaking additional cleaning services to prevent the spread of COVID-19 will understandably come at a cost. Landlords should check the service charge provisions within their lease as they are most likely to say that the costs can be recovered from the tenant under the landlord’s obligation of good estate management or where the additional services have been undertaken under statute.
Temporary closure of business – does my tenant still have to pay rent?
In the majority of commercial leases there will be a rent suspension provision to cover the tenant in circumstances where the property has suffered physical loss or damage by an insured risk (i.e. fire, flood, storm, escape of water). It is very unlikely that the lease will contain a provision to allow tenants to suspend rent in any other circumstances such as a worldwide health pandemic. Landlords should check the terms of their lease to determine in what situations a suspension of rent provision would be triggered.
In some parts of Asia, which have been more severely affected by the virus, landlords who have been forced to close restaurant and retail businesses have offered rental rebates of between 30-50% to assist their tenants in seeing out the COVID-19 outbreak. This would of course need to be offered as a gesture of goodwill and whilst there has been no requirement for these businesses to close in the UK, the public has been advised to refrain from all social activity which will has already hugely impacted on the retail and hospitality sector. Whilst landlords are under no obligation to renegotiate the terms of the lease at the request of the tenant, landlords should consider the implications of bringing a lease to an end when it is unlikely that they will be able to find a new tenant in the current climate.
Temporary closure of business – can my tenant bring their lease to an end?
If you are required by the UK government to close your premises your tenant may consider bringing their lease to an end under the law of frustration or by a force majeure clause. A force majeure clause in a commercial contract will seek to excuse one or both parties from performing the contract where certain events occur that are outside of the parties’ control.
Force majeure clauses in commercial property leases are uncommon however, landlords should check the terms of their lease and if it does contain a force majeure provision, further information on the enforceability of said clauses can be found here.
The law of frustration applies where a contract has been entered into and an unexpected incident occurs outside of the control of both contractual parties making it impossible for the contract to be performed as originally agreed. Whether a Lease can be frustrated has been the topic of discussion in the House of Lords on numerous occasions. Whilst it has been held that there are some very limited circumstances where a lease could be frustrated, to date, there is no reported case law where a lease has actually been frustrated. As a result, we find it very unlikely that a tenant will be able to successfully argue their lease has been frustrated as a result of a temporary closure of their building.
Ongoing considerations for landlords:
- Landlords should seek advice on their lease provisions so that they can take any necessary steps to protect their position;
- Landlords should regularly check updates issued by the World Health Organisation, UK Government and Public Health England;
- For all new leases, consider asking your solicitor to include provisions for future pandemics;
- Undertake more thorough cleaning to assist in containing the virus; and
- Consider flexible working arrangements and where possible, allow employees to work from home on a temporary basis.