By David Kemp, partner in the Real Estate & Development team at Blaser Mills Law.
COVID-19 has hit businesses hard, leaving many facing a considerable hit on turnover as well as having to make the tough decision to let some staff go, and to furlough others.
Loss of turnover may also result in business owners struggling to afford their commercial rent, and in such cases it is important that they check their leases to establish their own individual positions. Here are some of the main things commercial tenants need to be aware of if they find themselves unable to pay the bills.
Terminating a lease or tenancy
Tenants cannot terminate their lease if they choose to close their business or can no longer afford to pay their rent, unless their lease includes a break clause allowing them to do so. Break clauses are not uncommon these days, so it is worth checking.
It will not be a great comfort to learn that a lease can be terminated by a liquidator if a company goes into liquidation by way of a procedure known as ‘disclaimer’.
Commercial tenants may assume they can miss payments on their rent without penalty because COVID-19 isn’t something they could have foreseen or prevented, but that is not usually the case. For this to be at best potentially valid, tenancy agreements must include a ‘force majeure’ clause. Force majeure is a term meaning ‘superior force’ and is sometimes used in legal documents to reference an intervening act entirely outside of a party’s control, such as volcanic eruption, war and earthquake. Although commercial leases do not usually contain such a clause, tenants should check their leases as, if one is included, they may have a case to argue.
In most instances, the tenant of the commercial property will need to pay their rent as normal. However, it is important to note that the Coronavirus Act 2020 prevents any landlord from evicting a commercial tenant due to a missed rent – until 30 June 2020. That period can be extended by the Government if it wishes to do so and the provision itself does give some security to businesses who have found themselves in hardship.
Withdrawal of an exchanged agreement for lease (AFL)
An exchanged agreement for lease is a contract that has already been agreed between two parties to grant/take a lease at a future date. A tenant’s right to withdraw from an AFL depends on the terms of the agreement, but usually such agreements do not allow withdrawal.
If an agreement contains conditions that cannot be fulfilled because of COVID-19 then that could bring about a right to terminate – for example, a condition requiring a landlord to undertake certain work within a certain timeframe before the lease is completed and which the landlord can no longer achieve due to disruption caused by COVID-19. Where agreements contain such provisions, landlords and tenants would be well advised to discuss whether to extend any difficult timescales, given that COVID-19 was such an unforeseen circumstance.
Modern commercial leases usually contain a clause stating tenants cannot withhold rent payments. Therefore, a tenant is not entitled to withhold their payments or pay a reduced rate as a result of loss of business or cashflow issues. This also applies if a tenant decides to cease trading, whether temporarily or permanently.
The government is encouraging landlords to be understanding throughout these testing times and to discuss voluntary options with their tenants. Therefore, tenants and landlords may want to consider having their own private arrangements, exploring avenues such as rent holidays or concessions, or agreeing for the rent to be paid in smaller instalments, for example – monthly instead of quarterly. It is important that any terms agreed, such as a rent ‘holiday’ or changes in payment dates, are properly and legally documented so there is no ambiguity.
Some retail leases, especially those in shopping centres, contain a keep-open covenant, which requires tenants to actively trade for the duration of their lease. However, if the business chooses to close, the landlord can’t always force them to open under a keep-open covenant as these agreements are rarely enforced by the courts. ‘Following government guidelines’ is often an exception of keep-open clauses, however it will largely depend on the drafting of the clause and tenants should always check before making any decisions.
Insurance that may help
Tenants should review their insurance policies to see if losses due to pandemics are covered. If they have general liability insurance, a business interruption policy, crisis management insurance or mitigation insurance, they may be covered for losses during the COVID-19 outbreak.
Seek expert advice
Commercial tenants must take time to familiarise themselves with their lease, including all the key terms included, as well as check their insurance policy to see if they are covered for events like a pandemic. If they cannot pay their rent and need advice, they should speak to an experienced legal professional who will be able to guide them further, as well as review any agreements made with their landlord in order to reach the best possible outcome.