Paradigm solicitors LLP

Paradigm solicitors LLP

Landlord & Tenant vs Covid-19

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The impact of the coronavirus on commercial leases

We are facing unprecedented challenges as a result of the outbreak of COVID-19 and disruption to daily life is escalating, with the closure of pubs and restaurants in the UK and lockdown of European Union countries as well as China. The virus will have a significant impact on the real estate and retail sector as well as the health risk.

TBD UK Legal Consultant Ilyas Ahmetoglu, advised followings key issues that the landlords and tenants should consider in the current environment.

Termination of a lease

It is highly unlikely that a tenant or landlord can bring a commercial lease to an end as a result of the coronavirus.  A tenant/landlord may be able to terminate a lease if they have a break right to terminate it. A tenant may attempt to argue that the COVID-19 outbreak amounts to a ‘force majeure’ event – which refers to the occurrence of an event that is outside the reasonable control of a party and which prevents them from performing their obligations under a contract. However, this must be set out clearly in any legal document, i.e. a lease, which is not a clause commonly found in modern commercial leases.

Rent

If a tenant refuses to pay the rent, the landlord will entitle to either forfeit (terminate) the lease, issue a petition to wind up the tenant company, bankrupt if individual, instruct bailiffs to collect goods of the value of the lease rents or make a claim for losses/payment in the courts. It may mean the tenant is losing his or her lease, being broken up, bankrupt or incurring legal costs. 

However, the above is apply in the usual circumstance but we are in an unprecedented period of time. The Government’s the Coronavirus Bill, which received Royal Assent on 25 March 2020, gives the commercial tenants assurances that landlord will not be able to forfeit (terminate) a lease for non-payment of rent. This will apply for March quarter rent from 25 March 2020 until 30 June 2020. The government will consider further whether to extend this period.

This does not mean a “rent holiday” and tenant will remain liable for the rent accrued during this period. After this period, if it is not extended by the Government and the rent remain unpaid, the landlord will be able to forfeit the lease for non-payment of rent. It is therefore advised that the tenant should come to an agreement with their landlord to ensure that when the moratorium is lifted their lease will not be forfeited. 

It is, therefore, advisable to take practical action and communicate with each ether. The tenant may contact the landlord to ask the followings:

  • Reduction in rent;
  • Suspension of rent;
  • Offer monthly rental payment as opposed to quarterly payment; or
  • The rent is permanently or temporarily converted into a turnover only basis.

We have seen some examples that a new rent agreed at 25% of the turnover. Such agreements will depend on each lease, business, property and landlord, and the parties should consider whether to have a side letter or a deed of variation of the lease. Before taking any action, the parties should consult with their lawyers. 


Insurance

Several insurance policies may cover losses due to such pandemic. It is worth checking the following insurances:

  • Business Interruption policy;
  • General liability insurance;
  • Crisis management insurance; and
  • Mitigation insurance.

However, it is unlikely that most of the insurances with standard clauses will cover Covid-19 nor any similar viruses unless it is expressly mentioned in a policy.

Insurance companies usually require that any disease must be “notifiable disease” to be covered by a policy. On 5 March 2020, the UK Government announced that Covid-19 is to be listed as “notifiable disease”.  Non-damage business interruption insurance may cover the impact of an epidemic, but unfortunately, it is not commonly bought. It is still subject to the specific wording of the policy, and it is advisable to contact the insurance brokers or contact your lawyer to obtain initial advice.

One may be able to bring a claim for losses by the act of God if this is clearly stated in the policy.

Keep Premises Open Clause

The standard leases usually contain an obligation on tenants to remain open. The landlord may be able to seek damages or claim penalty for failing to open. Likewise, leases also have clauses for the parties to comply with the statute. Depending on the provision of the lease and the government’s guidelines and rules at any given time, keep open clause may cause disputes between landlord and tenant. If however, where a remaining opening is no longer possible due to coronavirus, compliance with statute clause should take precedence over the keep open provision in the lease. It may, however, give rise to a further dispute as to whether a landlord should expect to continue receiving rental income under the lease provisions as rent suspension clause will generally apply only in the event of any material damage and destruction of the premises.

As stated above, we are facing an unprecedented period, and we likely see legal battles between landlords and tenants or insurance companies which may well lead to some of the above-stated law and standard practices changed dramatically.  

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