The coronavirus and commercial property owners and tenants

The Chancellor announced that all retail and hospitality businesses will be exempt from paying business rates for 12 months in a bid to combat the financial damage caused by the outbreak.

The Chancellor announced earlier this month that all hospitality and retail businesses with a rateable value of less than £51,000 would be eligible for a 100 per cent rates discount. Those same businesses are now also eligible for grant funding of £25,000 to help cope with the impact of coronavirus.

That has now been extended to cover businesses of any size, “irrespective of rateable value”.

Since the announcement the Government has also introduced a wide ranging package of targeted measures to provide financial support to businesses during the coronavirus crisis.

Following the Chancellor’s announcement, industry figures said they were relieved with the ramped-up measures, but warned that more will need to be done as the coronavirus challenge continues.

Inn Collection Group Managing Director Sean Donkin said the new measures will “go some way to help support us” but as things stand  “they fail to provide the immediate and necessary funding and support that will keep people employed and in meaningful careers”.

In addition to the Government’s stated intentions to assist leisure sector businesses many commercial tenants operating in the leisure sector are now turning to their leases to explore what other options might be available. In a worst-case scenario, to see whether they can extricate themselves from their lease or, at the very least, ease the cash flow issues which will undoubtedly follow over the next few months.

Commercial contracts are also now a realm into which the Government has intervened by announcing measures protecting commercial tenants form eviction where the tenant is not able to pay its rent (see further below under the heading “Stopping paying the rent”.)

Government intervention in commercial contracts at this most fundamental level is unprecedented. It offers a lifeline, not only to commercial tenants, large and small, but also to the workers employed by those businesses.

Coupled with the previously announced 12-month business rates holiday for many premises, along with business loans, guarantee schemes and a package of employment support, the Chancellor, Rishi Sunak, hopes “this will help to make a real difference to firms across the country trying to protect jobs”

We have outlined below some of the commercial lease points likely to be of relevance to a tenant’s deliberations, when considering exiting leases or to tenants at this time considering entering into new leases.

Rent suspension

Most rent suspension clauses in commercial property leases are unlikely to come to the assistance of the tenant.  These clauses normally apply only where the premises has suffered substantial physical damage and are, as a consequence, incapable of being occupied, used or accessed.  The coronavirus pandemic does not involve any physical damage to a property, loss from the crisis will be purely financial. Such losses then will not be covered by the landlord’s buildings insurance policy in a way that will allow a tenant to claim rent suspension.

Notwithstanding the above however, the coronavirus is going to have a catastrophic impact upon the commercial property market. Landlords will undoubtedly, as a matter of good commercial sense, have to seriously entertain approaches from tenants seeking a rent suspension – even though there is no entitlement under their lease.

Some landlords may decide it is better to waive or suspend rental payments over the short term rather than face their tenants going out of business and leaving them with an empty building in a flat or dead market.

A measure falling short of a rent suspension would be for tenants to negotiate with their landlord’s monthly payments of rent rather than quarterly and for those monthly payments to be made in arrears, rather than in advance.

Stopping paying the rent

Commercial leases generally prevent a tenant from withholding payments of rent.  If a tenant stops paying rent there will be a breach of the tenant’s covenant to pay rent which, strictly speaking will entitle the landlord to forfeit the lease and/or seek to recover the arrears in the courts.  Simply stopping paying the rent then would not normally  be regarded as a viable  solution to tenants wishing to hold on to their lease.

However, on 23 March 2020, the Ministry of Housing, Communities and Local Government announced that all commercial tenants in England, Wales and Northern Ireland missing rent payments are to benefit from a government ban on forfeiture of their lease. This change, which will prevent landlords from terminating leases and evicting commercial tenants, is included in the Coronavirus Bill. It will come into force very shortly (once the Coronavirus Bill receives Royal Assent, which is expected to be in a matter of days) and will last until 30 June 2020, with an option for the government to extend this deadline.

It is anticipated that many commercial tenants will take advantage of the reprieve and withhold their rent. Importantly note the rules will apply not only to principal rent but to “any sum a tenant is required to pay”, leaving the burden of supplying services and insuring the premises on landlords.

It is also important to note that the protection offered by the government is from the threat of forfeiture should tenants withhold rental payments. The liability to pay the rent however remains.

The option then of having a conversation with the landlord around a rent suspension remains. The advantage of this being you might be able to negotiate a sensible and manageable  repayment program in respect of the withheld rent    .

Force Majeure

We have had several occasions over the last few days where commercial tenants have queried whether the current situation is a force majeure which may allow termination of the lease.  Clauses which allow a party to terminate a contract for a force majeure event or, to put it another way an “act of God”, are however extremely rare in modern commercial leases.  Even if there is such a provision in a lease, it would need to be drafted to apply to an outbreak of disease.

Frustration

Is the current pandemic an event which will allow tenants to argue that the lease has been “frustrated”?

This is unlikely. Frustration is a legal doctrine rarely used as a way of getting out of contracts. It operates to bring a contract to an early end because of the effect of a supervening event.  It is not a concept readily applicable to a situation where one party is looking to get out of a contract.  To be able to argue the doctrine of frustration, a tenant must be able to demonstrate that something unforeseeable has happened that makes it impossible to fulfil the contract and would be unjust to hold a party to its obligations.

This is not something that can be demonstrated easily.

The High Court looked at the doctrine of frustration in a case involving the European Medical Agency last year.  The court found that Brexit did not frustrate EMA’s lease.  EMA was granted leave to appeal that decision to the Court of Appeal, but unfortunately the parties settled the dispute so the arguments were not further tested.

Another reason for our belief that frustration is likely to fail is that, whilst the current lock-down may force business closures for what may be for a lengthy period, they will only be temporary.

New leases

The outbreak is certainly going to have an impact on new lease negotiations.

Undoubtedly many transactions will be put on hold or stop entirely.  Where negotiations continue, tenants may well look to strengthen rent suspension provisions.  It is also possible that tenants and their representatives will also now seek to include termination rights for unseen events.  The concept of force majeure may well start to appear more often in leases.

In both of the examples above however, such attempts are not likely to be well received by landlords who will undoubtedly suggest that tenants should ensure that their business interruption insurance policies are robust enough to protect them in the event of any future pandemic events.

Another approach that tenants might adopt in new lease negotiations (or indeed when seeking to vary existing leases), is to move away from the traditional market rent model to a turnover rent arrangement.  This will offer some protection going forward if trading conditions deteriorate, but again getting institutional landlords to agree to such an approach may prove difficult.

Please note that this article has been prepared based on current legal principles and in a highly volatile and ever-changing economic climate due to the coronavirus pandemic.

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