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23rd March 2020

COVID-19: Commercial Landlords and Tenants

By Kate Andrews

Landlords and tenants will be asking questions in light of the recent government request for social distancing and the lockdown which has now come into effect, forcing the closure of not only restaurants and cafes, leisure and hospitality venues, but also all shops selling non-essential products. This is no doubt causing serious concern to anyone running a business who is committed to a lease, and in turn landlords who may find that their tenants, being unable to trade, are failing to pay rent.

It has now been announced that legislation will be introduced to protect commercial tenants.

Below we consider some of the issues in question:

Withholding rent
As we have seen in recent announcements, the government plan to enact legislation banning the eviction of commercial tenants for non-payment of rent. The extent and specifics of the legislation remain to be seen, however the government say the new emergency laws “will mean no business will be forced out of their premises if they miss a payment in the next 3 months”.

This is likely to provide substantial comfort to businesses who are struggling to meet payments. That said, the rent due will remain payable to the landlord who can take other action for recovery of the debt.  It also means that the rent will need to be paid ultimately.  Tenants will need to, so far as they are able, make plans and decisions with this in mind so that their cashflow is properly managed.

At first blush this appears to be a blow to landlords, however, evicting a tenant and being left with an empty unit is not likely to be attractive to many landlords anyway.
Landlords, should, however take note and take advice on alternative remedies to recover the rent.

Reduction in rent
Usually a reduction in rent is only entitled to be given if there is damage to a property. Contractually, there are no grounds to expect this albeit, given the fact no evictions can take place, landlords and tenants may take a commercial view and negotiate a rent reduction for a period of time, if they wish.

Termination of lease
Generally speaking, a lease remains binding despite the difficult economic circumstances, unless you have a break clause or expiry. That said, in light of the enforced lockdown, there may be arguments to consider based on the particular facts and circumstances of each case.

Keep open clauses
A keep open clause is sometimes found in commercial rental contracts in the retail and leisure sectors requiring the business to be open on set days and hours. If a lease does not have a force majeure clause, technically the tenant is at risk if it closes the premises within those times. However it can be very difficult to enforce a keep open clause at the best of times, but especially so now given the current situation.

Turnover rent
Tenants should be mindful of turnover rental agreements which may incur a significant penalty for closure.

Insurance
Whether you can claim for losses relating to the lease (and other losses in general), very much depends on your particular insurance . You may be covered if you have an infectious disease policy, which is usually an add-on rather than part of a standard business protection policy. Notably, the UK government has confirmed its intention to declare COVID-19 a “notifiable disease”. This is a formal classification required by many insurance policies, so those who specifically have business interruption cover may be able to claim under it.

You should check all of your insurance policies to see whether loss due to infectious disease is covered.

Additionally, according to The Association of British Insurers, standard policies usually do not include provisions for forced closure even where the government has imposed a mandatory shut down.

Force majeure
It is extremely rare to see force majeure clauses in leases, nevertheless, it is worth checking.

Despite the legalities, landlords will need to be pragmatic and commercially minded during this period. Whilst rent reductions and terminations might not be possible, landlords may nevertheless consider unusual options and compromise with tenants to find mutually beneficial solutions

For further advice regarding landlord and tenant issues please contact Kate Andrews.

Visit Hamlins’ COVID-19 Hub for more updates on issues affecting your business.

COVID-19: Commercial Landlords and Tenants

Have a question? Contact Kate

Have a question? Contact Kate

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