Experts offer advice to retailers about leases amid coronavirus spread
Partner Philip Knight and Trainee Solicitor Joe Perry from law firm Womble Bond Dickinson have offered their advice to high street retailers, in preparation for what may be ahead due to the spread of Coronavirus.
On 11 March 2020 the chief of The World Health Organisation labelled the outbreak of COVID-19 a pandemic. The WHO has called for "urgent and aggressive action" and emphasised the need to "strike a fine balance between protecting health and minimising disruption".
The situation is evolving daily, but it has been recognised that many commercial landlords and tenants in the retail sector will be grappling with the disruption and uncertainty that the outbreak has already caused.
Both Knight and Perry have put together a number of answers to questions surrounding commercial retail leases and how landlords and tenants may be affected.
Will tenants be able to claim that their leases are 'frustrated' due to the outbreak?
Probably not. A tenant may seek to argue that, as a result of the COVID-19 outbreak, its rights and obligations have become 'substantially different' and thus that its lease has been frustrated.
The courts take a notoriously restrictive approach to frustration, and are unlikely to agree with such an argument. There have (to date) been no restrictions imposed on visiting retail outlets in the UK, and it is very unlikely that a short-term closure would amount to frustration.
A tenant may also try to suggest that the outbreak of COVID-19 is a 'force majeure' event, or an 'act of God', which has brought the lease to an end. Force majeure clauses are very rare in modern commercial leases. If a clause were to exist, it would need to be carefully reviewed to determine if situations of 'disease outbreak' or 'pandemic' were covered.
Will a tenant breach its 'keep-open clause' if forced to close or reduce opening hours?
This is likely to be a key concern for a tenant of retail premises. If the government issues emergency legislation imposing curfews, or an outlet is forced to close because the majority of its staff are self-isolating, a tenant may be in breach of its keep-open covenant (if applicable).
In contrast, most commercial leases also include an obligation on a tenant to comply with all relevant statutes and official guidelines. A tenant would be in breach of this covenant if it failed to follow any such guidance, e.g. by keeping its outlet open after an imposed curfew. How then can these two conflicting lease provisions be reconciled?
It is likely that the statutory provisions covenant would 'overrule' the keep-open clause. After all, it is well-established in the courts of England and Wales that keep-open clauses will rarely if ever be enforced by ordering specific performance . Furthermore, it would be difficult for a landlord to establish that it had suffered any loss caused by the closure (as opposed to wider events), especially if it was still receiving rent, and there were no turn-over provisions in the lease.
Will a tenant be able to rely on a rent suspension clause if it is forced to close?
This is unlikely. Most rent suspension clauses require the demise to have suffered some sort of material 'damage or destruction.' The primary effect of COVID-19 on retailers is likely to be financial, as a result of reduced footfall, rather than actual damage to the property itself
If rent is not suspended, can a tenant choose to withhold the rent?
In short, no. The vast majority of commercial leases prevent a tenant from withholding rent, which is normally considered to be a breach. If a tenant is concerned about its ability to pay the rent it should contact its landlord, or its landlord's representative, to resolve any issues directly.
Who is responsible for any increased cleaning costs and will this affect the service charge?
Probably the tenant, through the service charge provisions. At present there are no specific legal obligations on commercial landlords to carry out extra cleaning to prevent the spread of COVID-19. However, many landlords have taken pre-emptive measures and have arranged for more frequent, thorough, deep-cleaning of common parts (particularly surfaces that are touched regularly, such as hand rails).
Many service charge clauses contain a provision permitting a landlord to recover 'reasonable costs', or the costs of works carried out as part of good estate management and it would be difficult for a tenant to argue that more thorough cleaning of the common parts was 'unreasonable' or not good estate management during a pandemic. Some service charge clauses also refer to recovering costs that a landlord has incurred in complying with 'applicable laws'. This may become relevant if the government issues emergency legislation or guidelines on cleaning public areas in the future.
It is also a good reason for landlords to review their service cost base in both the short and long term, thinking now about how they can limit service costs in the event that there are some more extreme measures and a dip in footfall over the coming weeks/months, for example, flexibility to cut back on services (or terminate/suspend agreements with service providers) in the event of closures and/or fewer visitors. This should be happening now to avoid incurring unnecessary service costs.
Could a landlord restrict access to common parts to prevent the spread of COVID-19?
Most likely, if acting reasonably. The majority of commercial leases permit a landlord to restrict access to common parts of its building in an emergency. What will constitute an emergency is of course dependent on the facts.
If the COVID-19 pandemic continues to escalate and a landlord decides to close common parts of its building to protect its tenants and the wider public, it may be difficult for an aggrieved tenant to establish that the landlord was acting unreasonably and outside of an 'emergency' situation. The landlord's position would of course be strengthened if the government were to issue emergency legislation or guidance restricting access to public spaces.
What should we do moving forward?
It is likely that the negotiation of commercial leases in the coming weeks will pay close attention to the obligations of the parties in relation to COVID-19, as well as any future events of a similar nature. It may be that 'force majeure' clauses start to become more commonly requested by tenants seeking to enhance their ability to terminate a lease in such unforeseen circumstances.
Current tenants are advised to check their existing business interruption insurance. Most policies of this nature are related to property damage, but there are some policies available which also cover the impacts of an epidemic.
As the events of the COVID-19 continue to unfold, it is strongly advised that all landlords, tenants and members of the public keep up to date with the latest guidelines issued by the UK government and the WHO.