The impact of COVID-19 on lease and contract reviews
Business protection from forfeiture
We have been working closely with landlord and business owners to help them interpret The Coronavirus Act 2020. In effect, the landlord’s right to forfeit for unpaid rent has been frozen until 1 July, although this date could be extended. The intention is to open up a window where landlords and tenants can discuss options and come to an arrangement short of forfeiture – perhaps through rent-free periods, deferrals or other concessions – that benefit both parties.
The restrictions apply to the failure to settle any sum payable under the relevant business tenancy including rent, insurance, service charges and interest. Should tenants fail to make payments during this current period, it will still constitute ‘late payment’, and interest will accrue in accordance with relevant provisions within the lease.
Exercising break options
For any tenants reviewing existing tenancy agreements and considering whether to exercise break options, there are a number of factors worth bearing in mind. For example, most provisions will require that notice is served in writing and delivered either by post or by hand. In the current crisis, that is easier said than done. Complying with break conditions raises cashflow issues, as most leases will require all sums due up to that point to have been paid in full. This in itself may prove difficult in the current circumstances.
Tenants exercising their break option should consider how they plan to physically comply. They will almost certainly be required to remove their fixtures and fittings from the building and, in some instances, reinstate any alterations, returning the property to its prior state and to ‘make good’ any physical damage caused. With restrictions on non-essential services growing ever-tighter, it may prove difficult to arrange for relevant tradespeople to carry out the necessary work.
The implications of exercising break rights
Once the break notice is served, there really is no going back. Some tenants may serve notice thinking they can revoke after a deal is reached. However, once exercised, a break notice cannot be withdrawn unilaterally.
While a break notice can be withdrawn mutually, caution is advised. The existing tenancy is surrendered on the break date, and a new tenancy will be granted to the tenant from that date. This could have adverse implications for the landlord, particularly in cases where the previous tenancy agreement excluded security of tenure. Ending the tenancy could also impact banking covenants or covenants of any superior interest in the property – for example a head lease that requires any sub-lease be excluded from the protection of the security of tenure provisions in the Landlord and Tenant Act 1954.
Can a lease be set aside due to unforeseen events?
Certain clients have asked whether a tenancy can be set aside for ‘frustration’ if the tenant cannot utilise the premises for the purposes they were intended for. At the time of writing, there are no reported cases of the law of frustration being successfully argued in relation to a lease. It is therefore unlikely that the coronavirus will frustrate a lease, unless a court determines otherwise.
Some clients have discussed potential derogation from grant, either via a ‘quiet enjoyment’ clause covered in the lease or as a term implied in to the lease that prevents a landlord from interrupting a tenant’s use and enjoyment of the premises. A landlord would breach such a provision if they prevent access to the building. However, in the case of residential leases landlords may be entitled to follow public health guidance by limiting access to certain common parts of a building.
Also, it seems unlikely COVID-19 will fall within a force majeure clause unless it specifically includes words such as ‘epidemic’ or ‘pandemic’. Such inclusions may be commonplace in future. Where a clause does not list events, courts would consider the intentions of the parties, and determine whether they intended certain events to be covered. Landlords and tenants should determine whether any relevant rent suspension clause is included in the lease.
Rent deposit deeds
Lastly, some rent deposit deeds will provide for all or part of rent deposits to be returned upon satisfying certain criteria. When times are good, it is surprising how often these provisions are forgotten. For businesses experiencing cashflow issues, it may be worth undertaking a review of documents to see if any such provisions can be triggered.
From a landlord and owners’ perspective, most of our clients are openly engaging with occupiers and tenants and working through how best to move forward. Be aware though that depending on financial covenants and debt exposure, any course of action may be dictated by the lenders’ requirements. It therefore requires all parties, including lenders, to be committed to undertaking constructive dialogue that allows cool heads to prevail.
This article has been adapted from the webinar “How does the real estate sector navigate COVID-19?”, part of a three part webinar series, held with Grant Thornton and Aztec Group, on the effects of COVID-19 on all aspects of the real estate industry. For more information, please contact Eddie Richards on +44 (0)20 7427 6615 or at email@example.com.