Coronavirus: Potential Impact On Business Lease
The World Health Organisation has now declared the COVID-19 outbreak to be a pandemic and it is a major concern for commercial landlords and tenants.
Could Coronavirus terminate a commercial lease?
Force majeure clauses allow parties to be released from their obligations and bring agreements to an end in the event of occurrence of certain events outside of the parties’ control. A pandemic could be considered a force majeure event depending on the terms of the force majeure clause in the particular lease. However, it is unusual to see force majeure clauses in leases.
The doctrine of frustration of a contract can bring a lease to an end if an event occurs which is fundamental to the terms of the lease, making it impossible to perform the obligations under the lease or if the event radically changes the party’s principal purpose of entering the lease. However, this doctrine is very difficult to invoke in actual practice. Therefore, it is likely that commercial leases will continue regardless of coronavirus measures preventing tenants occupying their premises.
What are the options available to commercial Tenants if they cannot pay rent?
Under the current circumstances, an open discussion with the landlord to negotiate a ‘rent-free’ period would be a sensible initial way forward. The landlord may agree to grant a ‘rent-free period’ in exchange of: (a) extending the lease period or removing ‘break clause’ in the lease so as to provide some certainty to future inflow of income; (b) allow a rent-free period for one or two quarters in exchange for fixed higher rent the following year and (c) continuing occupancy in return of tenant being liable for rates and building security.
However, if the landlord is unwilling to reduce the rent or come to an understanding/settlement and the tenant is suffering from reduced cash flow, the landlord shall have to enforce their rights to forfeit the lease and charge default interest. However, it might not be the best option for the landlord either, as it will be difficult for the landlord to find new tenants under the current circumstances.
Protection from forfeiture of lease by Landlord:
UK legislative bodies have passed several legislations to combat the current impacts of coronavirus on commercial businesses. Under Part I, Section 82 of the Coronavirus Act, 2020, it has been provided that the right of re-entry or forfeiture by landlord, for non payment of rent by the tenant, may not be enforced, by action or otherwise during the initial period of 26th March 2020 to 30th June 2020 (‘Relevant Period’). However, this does not take away the inherent right of forfeiture from the landlord (unless the landlord has given an expressed waiver in writing) for non-payment of rent.
Further, any order made by the High Court or the county courts, during the Relevant Period, for proceedings commenced prior to the Relevant Period, wherein, the possession of the property is to be returned to the landlord, the Courts to ensure that tenant does not have to give back possession before the end of the Relevant Period. Under the aforesaid Act for the purpose of determining whether a new lease should be granted to the tenants due to persistent delay in payment of ground rent, any failure to pay rent during the Relevant Period should be disregarded.
In conclusion, the Coronavirus Act, 2020, has provided much needed relief, for the time being, to the tenants in commercial leases. However, the situation with regards to coronavirus is constantly developing and changing and it is imperative to stay up to date on and appraise oneself with the latest government guidance.
How can Askews help me?
If you have a business lease and you are worried about your position, ability to pay rent and want to try and negotiate a settlement/variation with your landlord, contact Mr Kuljeet Sandhu, head of Commercial, who will be able to discuss your options with you.
