March 13, 2020

COVID-19 UK: Real estate update for tenants

As the Government's Deputy Chief Medical Officer warns that the start of the UK peak of the COVID-19 (coronavirus) epidemic is expected within the next 10 to 14 days, tenants are considering what their rights are in the worst case scenario.

For retail clients, what happens if footfall is drastically reduced, say by up to 90 percent? What happens if a landlord shuts their building because someone in the building has contracted the virus? What happens if a public body requires that their building is shut or an area is quarantined as has happened in Italy?  The main questions on most tenants' lips in the scenarios outlined are: can we suspend our rent payments or even terminate or treat our lease as terminated?  This briefing provides a guide to whether either of these options is viable.

Can I suspend rent payments to my landlord?

Any right that you may have to suspend your rent will be expressly set out in your lease.  In the context of most modern commercial leases, it would take the form of a rent suspension provision.  However, in nearly all cases the trigger for rent suspension will be tightly defined and is unlikely, except in the narrowest of circumstances, to allow you to suspend rent payments due to the impact of COVID-19. 

Most rent suspension provisions allow you to suspend rent payments only if the property is destroyed or damaged by an insured risk or an uninsured risk.  It would be very unusual for the definition of insured risks in the lease to include disease or pandemic (although possible consequences of the spread of COVID-19, such as civil commotion might be an insured risk).  By extension, uninsured risks will usually not extend to disease or pandemic either because uninsured risk typically means any risk specified as an insured risk in the lease which is not actually insured against for various reasons. Furthermore, COVID-19 will not cause the physical damage to property required by a typical rent suspension provision.  The only scenario which we can envisage might allow for rent to be suspended would be if the rent suspension provision did not require damage to property, but instead was triggered by the property becoming inaccessible, and this occurred due to an insured or uninsured risk, such as civil commotion triggered by the spread of COVID-19.

In addition, where you have a very old lease, it is possible that your lease might contain a clause which permits you to terminate the lease or possibly suspend or delay payments, such as rent, on the occurrence of a specified event, a so-called force majeure clause. However, our view is that it would be hard to classify COVID-19 as an 'event' for the purposes of force majeure (although events triggered by COVID-19, such as enforced quarantine might be).  Much will depend on the wording of the force majeure clause and the exact measures taken to contain the spread of the disease.

Can I terminate or treat my lease as terminated?

Any contractual right to terminate will be set out in your lease, typically in the form of a right to terminate on damage to property by insured risk or uninsured risk or, rarely and usually only in the context of old leases, in the form of a force majeure clause.  For the reasons outlined above (and with the same limited exceptions), our view is that the impact of COVID-19 would not usually be sufficient to trigger these rights.

Aside from your contractual rights to terminate, a lease may come to an end by 'frustration'. This arises where a serious event occurs after the lease has been entered into which is both unexpected (so that any contractual force majeure provisions do not cover it) and beyond the control of the parties, which renders it physically or commercially impossible to fulfil the lease, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the lease.  However, there are no reported cases in England where a lease has been held to be frustrated.  It follows that the hurdle that must be cleared for frustration to occur is very high; in our view, it is unlikely that COVID-19 would clear this hurdle.

What then is a tenant to do?

In most scenarios the options of suspending rent payments or terminating a lease are not going to be viable. So what can you do?  Our best advice would be to look at your own insurance policies to identify whether your losses will be covered. The answer will not be cut and dry, not least because many business interruption insurance policies and contingent business interruption insurance policies require damage to property, but the specific answer will depend on the types of policies you have, and the language and clauses used in these policies. It is therefore essential that you have these policies reviewed so that you can understand and manage your current and future COVID-19 related risks.