The response to the COVID-19 pandemic is creating a number of challenges for landlords and tenants, and we are advising many of our clients on issues arising from the restrictions that are in place to control the spread of the outbreak. We set out below answers to some of the most frequently asked questions, together with some practical options that may be appropriate for consideration.

Can a tenant terminate its lease as a result of the COVID-19 outbreak?

A tenant may argue that the COVID-19 outbreak amounts to a ‘force majeure’ event. This is an event that is outside the reasonable control of a party and prevents that party from performing its obligations under a contract. To apply, there must be a force majeure clause in the contract and the clause must be drafted widely enough to cover the situation. Force majeure clauses do not usually appear in modern commercial leases so this argument is not likely to succeed.

A tenant may also argue that its lease has been “frustrated”, where it is temporarily unable to occupy its premises as a result of the outbreak. Frustration arises where an event occurs which is not provided for in the contract in question, and which changes the nature of the contract so significantly that it is impossible for the contractual obligations to be performed - with the effect that the contract comes to an end. There are no reported cases in England where a lease has been found to have terminated by frustration. It is unlikely that frustration will apply in the context of a temporary inability to occupy.

Ultimately, a tenant can only terminate a lease early if it can exercise a break right in the lease. If there is a break right, then it may be more likely in the current circumstances that the tenant will opt to exercise the break and bring the lease to an end. In order to maintain flexibility, it may be possible to agree to vary the lease in relation to any upcoming break clause by extending the break date to a later date.

Can a tenant stop paying rent or reduce the amount of rent paid under its lease?

The rent suspension provisions in the lease will need to be reviewed to determine whether the COVID-19 outbreak triggers any suspension or reduction of rent. In most cases, the obligation to pay rent is only suspended (or reduced) where there has been damage to, or destruction of, the premises by an “insured risk” (as defined in the lease) or, sometimes, an uninsured risk. Given that no damage or destruction arises as a result of COVID-19, it is unlikely that rent suspension provisions will apply. 

If rent suspension provisions are found to apply, then the landlord should look to its “loss of rent” insurance cover. Tenants can also consider their own business interruption insurance cover.

Section 82 of the Coronavirus Act 2020 postpones a landlord’s right to forfeit a business lease for non-payment of rent for the period between 26 March 2020 and 30 June 2020. This period may be extended by the Secretary of State. The actual requirement to pay rent is not suspended but a landlord will not be able to commence action against a tenant during this period. “Rent” is defined widely, and extends to all sums payable under the lease in question including insurance rent, service charges and outgoings. 

The concession relates to any “business tenancy” (as defined in Part 2 of the Landlord and Tenant Act 1954) and will include leases excluded from, and those within, the security of tenure provisions of the 1954 Act. Any arrangement which is labelled a “licence” but which is in substance a business lease will also be captured. Landlords are protected from inadvertently waiving the right to forfeit the lease or re-enter for non-payment of any charges by conduct, except where they give an express wavier in writing. Therefore, landlords can continue to deal with leases in the usual way – for example, dealing with applications for consent.

It may be possible to agree alternative arrangements to apply to rent provisions during the pandemic, for example:

• Negotiating alternative dates for rental payments e.g. monthly payments instead of quarterly payments
• Agreeing that an upcoming rent review will be deferred until, say, 3 months later

It is important to ensure that any agreed concessions are clearly documented and signed by both landlord and tenant (and any guarantor), to avoid future disputes as to the agreed terms. While there is no legal obligation on a landlord to agree to any concession, there may be commercial pressures and reputational issues at stake and it is likely to be in both parties’ interests to reach a workable solution.

Can a tenant close its premises or reduce its opening hours?

A tenant can close its premises unless there is a “keep open” clause in the lease. There may also be a clause which requires that the premises must not be left empty for an extended period, which will be breached by the government-directed closure period.

However, it is likely that a lease will also include a requirement to comply with statutory requirements. Where legislation is made by the government to force closure, or specific guidance is issued by a public authority (for example, Public Health England) it will be difficult for a landlord to enforce any breach of a “keep open” clause or for a tenant to argue it must remain open for certain operating hours in order to comply with its lease covenants.

Is it possible to apply for “void relief” from business rates payments, where no-one is working from the premises?

While the approach may vary between local authorities, it currently seems most likely that a test of “beneficial occupation” will be applied in respect of any such application. Accordingly, the beneficial storage of documents, goods and chattels in the premises would prevent an applicant from being able to establish the premises are empty, even if all usual occupants are working from home. Tenants should, instead, consider if they are entitled to the business rates holiday announced for the retail, hospitality and/or leisure sectors.

How Capsticks can help

Each situation will depend on the specific lease terms in place and so this note is intended to provide general guidance and not specific legal advice. We would be happy to assist separately with individual queries.

If you have any queries around what's discussed in this article, and the impact on your organisation, please speak to Matthew Hunter, Sarah Skuse, Dan Kirk or Vicki Moore to find out more about how Capsticks can help.