With the COVID-19 pandemic continuing to cause an unprecedented disruption to UK businesses, commercial tenants are naturally anxious about how their lease obligations may be affected. What key issues should you be considering?
Does government guidance affect my lease obligations?
Most standard form commercial leases require a tenant to comply with all statutes, by-laws or regulations of any competent authority, which will typically include any Act of the UK or Scottish Parliament, and any delegated law made under it.
Tenants will therefore find themselves in breach of their lease obligations if they fail to comply with the new emergency measures introduced in Scotland by the Coronavirus (Scotland) Act 2020 – and, in England, Wales and Northern Ireland, by the Coronavirus Act 2020 – so far as they relate to their use and occupation of the premises. In most cases, this obligation will also preclude the tenant from doing anything (or failing to do anything) that could impose any liability on the landlord under these Acts.
The UK Government has issued a list of businesses and venues that must close in order to prevent the spread of COVID-19. Among the businesses listed are leisure facilities, food and drink establishments and retailers (subject to certain exceptions).
Where any owner, proprietor or manager carrying out a business contravenes government regulations, that party commits an offence and will be liable to pay an uncapped fine. These regulations will apply to commercial landlords and tenants, and will impact on their respective lease obligations to open, and trade from, their premises. Parties are advised to familiarise themselves with the terms of their lease, and the government’s updated guidance, as the situation develops.
Is the Coronavirus pandemic a force majeure event?
A force majeure clause dictates what is to happen if performance of a contract becomes impossible because of a supervening event beyond the control of the parties e.g. acts of war or terrorism, strikes, natural disasters or a fall in the value of currency. These clauses are often interpreted restrictively by the courts but, if triggered, can suspend performance, excuse liability for non-performance or (in some cases) discharge both parties from their contract. Such clauses are, however, extremely rare in modern commercial leases.
Tenants should review their lease to establish:
- whether it contains a force majeure clause and, if so, whether the coronavirus outbreak falls within its scope. Use of the term ‘pandemic’ or ‘epidemic’ may cover COVID-19, though much will turn on the precise wording of the clause.
- what impact (if any) that event has had on the parties’ ability to perform their contract and whether any reasonable steps could have been taken to mitigate the impact of that event. In the context of a commercial lease, compliance with government and parliamentary guidance in respect of social isolation, and the closure of commercial premises, is most likely to be relevant; and
- whether their lease imposes on them any formal obligation to provide notice to their landlord of their intention to invoke, or rely on, the force majeure clause. Tenants should refer to the general notice provisions of the lease to ensure that any notice given under a force majeure clause is given within the prescribed timescales, and in compliance with the general requirements of the lease.
Where a lease does not contain a force majeure provision, tenants will want to know whether the doctrine of frustration could relieve them of their lease obligations.
Is my lease ‘frustrated’ by the COVID-19 outbreak?
If, after parties have entered into a contract, a supervening event for which the parties have made no provision occurs to prevent its future performance, the contract may be deemed to have terminated or ‘frustrated’, discharging the parties from their obligations.
However, the threshold for proving ‘frustration’ is set very high. The parties need to establish that some supervening event has gone to the ‘root’ of the contract, rendering performance of their obligations impossible, or radically different to what was contemplated when the contract was entered into. In the context of the current outbreak, impossibility of this sort is most likely to arise in contracts of sale or carriage, where insufficient staff, materials or transport providers means that some contractual obligations are no longer possible to perform. In a commercial lease, where tenants’ obligations relate primarily to payment of rent, which are not suspended by the COVID-19 outbreak (more on which below), it seems unlikely that arguments of frustration on the grounds of ‘impossibility of performance’ will be successful.
To establish ‘commercial frustration’ i.e. that a supervening event has destroyed the basic assumption on which the parties contracted, it is necessary to establish that performance has been rendered radically different as a result of that event; it is not sufficient that performance has become less profitable or, indeed, unprofitable for one of the contracting parties. So, while commercial landlords and tenants will, in the coming weeks and months, struggle with their respective incomes, economic hardship is not per se a ground for frustration of a lease.
To date, there have been no reported cases in England where a lease has been found to have been frustrated, and only a small number of cases in Scotland. More significantly, there do not appear to be any reported judgements, in either jurisdiction, in which the doctrine of frustration has been addressed in the context of a pandemic.
Reference can, however, be made to a judgment delivered by the Hong Kong District Court during the SARS outbreak in 2003. Here, the court considered whether a 10-day isolation order, which prevented the claimant from returning to his flat, frustrated his lease and thus discharged him from his obligation to pay future rent. The court held that, in circumstances where the term of the lease was two years, a 10-day exclusion from the property was comparatively ‘insignificant’.
This case serves as a useful example of how Scottish courts may address frustration arguments and, in particular, the length of the social isolation or ‘lockdown’ period as against the length of a lease term. Since both the UK Government and Scottish Parliament have made clear that their ‘emergency legislation’ is intended to apply only temporarily, tenants are likely to struggle to meet the ‘high bar’ of frustration.
What about my rental liabilities?
Tenants who can no longer occupy their leased premises because of the coronavirus pandemic may try to seek, from their landlord, a rent suspension or reduction (on which further advice can be found here).
Most modern commercial leases will make provision for a suspension of rent where premises are destroyed or damaged by any insured risk (or, in some cases, an uninsured risk), rendering them no longer fit for occupation or use. However, while the outbreak will undoubtedly impact on a tenant’s ability to use or occupy their premises, it will not cause damage or destruction to them and is therefore unlikely to entitle a tenant to a suspension of rent. Of course, each case will turn on its own facts, and tenants are advised to review the precise wording of their rent suspension clause to assess the merits of such an argument.
‘Insured Risks’ should be expressly defined in the lease, and will usually include risks of fire, lightning, flood, earthquake and impact by aircraft, along with ‘any other risks against which the landlord reasonably insures from time to time’.
The World Health Organisation has categorised the COVID-19 outbreak as a ‘pandemic’, something for which a landlord’s insurance policy may have provided cover. While pandemic cover is not normally included in insured risks, if the landlord's policy includes it, the tenant may be entitled to a suspension of rent. Tenants should request of copy of their landlord’s insurance policy, and review the express terms of their lease, to confirm the position.
Where a property owner’s insurance cover does not extend to pandemics, and/or where the ‘Rent Suspension’ provisions of the lease are not engaged, the tenant’s liability for rental payments will continue. However, new protective measures introduced by the UK Government and Scottish Parliament will have some impact on how that liability will be enforced.
Specifically, until 30 June 2020, commercial tenants in England, Wales and Northern Ireland will have a blanket protection against forfeiture for non-payment of rent, or other sums due under a lease. Scottish landlords must now provide their tenants with at least 14 weeks’ notice before terminating or ‘irritating’ a commercial lease because of missed rental payments. Further information on these new protective measures can be found here.
What other support is available to tenants?
The Government has been swift to offer support and reliefs to ailing businesses.
Financing, including term loans and overdrafts, is being made available to all small and medium-sized businesses based in the UK with a turnover of less than £45 million through the Business Interruption Loan Scheme. Qualifying businesses can apply for up to £5 million, and smaller businesses can apply for a Business Interruption Payment to cover interest and fees for the first 12 months. While the Scheme will ensure that affected businesses can still operate, participants will be liable for sums borrowed in the usual way. Additionally, funding over £250,000 will require the business to provide security. Further information is available from the British Business Bank.
Larger businesses making a “material contribution” to the UK economy can ask the Bank of England to buy their short-term debt under the Covid-19 Corporate Financing Facility.
Rates and tax relief: Across England and Scotland, 100% non-domestic rates relief is being made available to businesses in the retail, hospitality and tourism sectors. Grants of up to £25,000 are also being made available to businesses in these sectors, and up to £10,000 to smaller businesses in receipt of Small Business Bonus Scheme or Rural Relief in other sectors.
Businesses with outstanding tax liabilities can contact HMRC to request Time to Pay. VAT payments are also being deferred for businesses across the UK for three months.
Alyson Shaw is a solicitor in Shepherd and Wedderburn’s property and infrastructure disputes team. For more information, contact Alyson on 0131-473 5695 or at email@example.com.
With thanks to Shepherd and Wedderburn trainees Sarah Drummond and Daniel Parcell for their research support.