Advice on commercial landlord & tenant issues in the light of Covid-19
Frequently asked questions for landlords and tenants
Over the last few days we have been helping both landlords and tenants to respond to the Covid-19 crisis. Here is a summary of some of the questions that have come up. Please do get in touch if you need support in reviewing leases or if you have any questions we have not covered.
If a visitor to my premises contracts Covid-19, am I liable?
Any visitor will have great difficulty in proving that he or she caught Covid-19 from your premises, as opposed to elsewhere. Technically, you could be liable under the Occupiers Liability Act if it can be proved that that visitor caught Covid-19 from your premises. If you are taking all reasonable steps to prevent the illness spreading, certainly if you have been complying with the Government's advice throughout, then that should serve as a defence because the liability is only to take such steps as are reasonable. Make sure that you have adequate records of what steps you have taken to protect the public.
If the Government orders me to close my premises, could my tenant argue they are not obliged to pay rent?
Check every lease first. The lease may well contain a clause that says that in certain circumstances rent can be suspended. This is usually linked to the insurance provisions that the landlord has to take out (usually paid for by the tenant through an insurance rent). Some buildings insurance policies will cover rent suspension due to disease, but the wording of each policy will need to be checked carefully. Be aware that insurers will fight very hard not to have to pick up this liability.
Most leases do not now contain what are called "force majeure" clauses – i.e. a clause allowing the parties to walk away from the lease in the event of pre-agreed circumstances, usually outside the parties' control. Even leases that do contain such a clause are unlikely to have one which refers to an outbreak of public infection causing the closure of the premises. Check your lease.
Keep open clauses. These are less frequent now in leases (even in leases to anchor tenants in retail developments) because they are not enforceable by an injunction. The landlord's rights would therefore only be for forfeiture (unlikely if we are talking about an anchor tenant in a retail development) and damages (which is probably unprovable as being a result of the tenants not keeping the premises open, rather than the wider downturn in the economy).
Frustration: Is the lease frustrated?
The legal term of "frustration" arises when an event happens outside the contemplation of the parties when they entered into the lease, which was not the fault of the parties, but is so fundamental that it makes the performance of the lease impossible. If, as is hoped the current crisis is temporary, this should mean that the interruption will also only be temporary. Many tenants will struggle to get out of their lease obligations by arguing frustration, because the inability to perform the contract has to be permanent. Things may be different if the lease only has a few months left to run.
Breach of the covenant for quiet enjoyment or derogation from grant
If the premises are closed on order from the Government, that will not be the landlord's choice. Even if the Government has not ordered the closure of the premises, but has simply issued guidance suggesting that this is the correct course of action, an attempt by a tenant to avoid paying rent on the basis of either derogation from grant or breach of covenant for quiet enjoyment would be extremely difficult to get off the ground. Both require an act or a decision on the part of the landlord.
Who pays for the extra costs?
If the lease carries a service charge, check it to see whether additional costs are included in the list of services recoverable through the Service Charge. Sweeper clauses or clauses of a more general nature (such as good estate management clauses) are likely to be of limited effect. They are usually interpreted as extending existing heads of service charge claim above rather than creating new ones.
Be aware of Health and Safety legislation and Government standards concerning buildings or parts of buildings that are controlled. When deciding who is the "responsible person" for most Health and Safety legislation, if the landlord retains part of the building (e.g. has demised internal elements to the tenant but retains the structure and common parts, etc.) this will probably be the tenant for the demised premises and the landlord for retained parts.
Will insurance step in?
Insurance claims can only be made where there is an existing insurance policy against the specific risk in question. Both landlords and tenants may well have taken out property damage and business interruption cover. These tend to cover losses flowing from physical damage to property rather than loss of business due to infection or Government shutdown. Each insurance policy will have to be examined separately as some policies will contain coverage for losses caused by disease.
Will this affect a turnover rent?
Undoubtedly turnover rents will be affected. The lease will set out exactly how the rent is to be calculated – particularly what is included in, and what is excluded from, "gross turnover", so there should not be much scope for debate. Many turnover rents carry a base element which will is payable regardless of the tenant's performance. Pure turnover based rents are likely to be subject to the greatest variation.
How will this effect rent reviews?
The key will be the date of the review. If the review date preceded the crisis, subsequent events should have no bearing on the valuation.
For rent reviews where the review date occurs in or after March 2020, the current crisis will be admissible but should only be taken into account insofar as it affects the valuation on the review date. Therefore, if a rent review is due for March 2020, the hypothetical landlord and tenant should be taken not to know how long the current situation will last. It may be that for review dates in a few months time there will be a clearer picture.
Landlords should, as ever, check they do not inadvertently miss triggering rent reviews where their leases state that time is of the essence for reviews.
If the premises are closed down, what should I do about security?
Landlords should put in place proper secure measures if only to ensure that insurance policies are maintained – failure to do so may invalidate the insurance and may also put a landlord in breach of lease obligations.