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(COVID-19) Lease obligations for commercial tenants

In the commercial property world, the key development is the protection from eviction for commercial tenants who are unable to pay their rent due to cashflow problems resulting from the COVID-19 crisis.

In short, no business tenant will be forced to move out of their commercial premises, should they miss a rent payment in the next 3 months. The tenant will still be liable for their rent after the 3-month period ends.

These measures are reassuring for tenants, but may be less so for landlords. Various types of rental concession might be agreed, ranging for example from monthly instead of quarterly payments to discounts and deferments.

It is really important that everything agreed between the landlord and tenant is fully documented. In the case of deferment, for example, you will both need to agree on a payment plan, and the landlord should consider whether they charge default interest or compensatory interest, and from what date. Landlords will also need to think about which kinds of payment the concession should apply to. Is it just rent, or service charge too? In the case of retail leases, how should turnover rent be dealt with?

The contractual obligations still prevail, however, and landlords are not under a legal obligation to change the terms of the lease, leaving many “between a rock and a hard place”.

During this confusing time, here are just a few of the questions that commercial tenants are asking us at the moment.

Can I rely on a break right to terminate my lease?

Tenants will need to check their individual leases to see whether they have the benefit of any upcoming break right, which allows them to serve notice to terminate the lease in advance of a specific date.  Break clauses usually contain a list of conditions that a tenant will need to comply with, such as giving vacant possession, so you should seek advice before attempting to exercise any break rights.

What if the contractual term of my lease has expired?

If the contractual term of a lease has expired and the tenant is “holding over”, it will be possible to bring the lease to an end by serving notice on the landlord.  The required notice period will vary depending on the circumstances and, again, we suggest that you obtain advice on this process.

Does the contract law doctrine of ‘frustration’ apply?

If neither of the above circumstances are applicable, it could be considered that the contract law doctrine of ‘frustration’ applies. This refers to an unforeseen event rendering contractual obligations impossible to meet.  However, this is uncharted territory; it has never been applied by the UK courts in the context of a lease, so it is very unlikely that a lease would be considered to be frustrated as a result of COVID-19.

Is COVID-19 a ‘force majeure’ event?

Similar to above, a ‘force majeure’ clause is usually seen in a contract law context and essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs, such as a war, strike, riot, crime, plague or any other event deemed an “act of God”.  Unfortunately, this is unlikely to be helpful as force majeure clauses are not usually included in commercial leases.

If all else fails, can I surrender?

It is worth mentioning that a landlord may be willing to agree to surrender a lease if it has other intentions for the premises or is able to re-let the premises to another tenant despite the current market conditions.  The terms of any such agreement should be carefully documented.

Article written and contributed by Nigel Whittaker of Willans LLP 

DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. It is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered above, please speak to Willans LLP  directly

Published on 14th April 2020
(Last updated 22nd April 2020)

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