COVID-19 – Q&A: How is it affecting landlords and tenants?
COVID-19 is going to have an enormous impact on all of us over the coming weeks and months. Laura Bushaway from our Real Estate Disputes team has pulled together answers to some of the key questions that are likely to arise between landlords and tenants.
1. Can a lease be terminated by frustration as a result of COVID-19?
It is unlikely that COVID-19 will frustrate a lease unless the Courts determine otherwise. In Canary Wharf (BP4) T1 Limited & Others v. European Medicines Agency [2019] EWHC 921, the High Court held last year, that Brexit didn’t frustrate a lease. Currently, there is no reported case of the law of frustration being successfully argued in relation to a lease. The Court placed much weight on the fact that the European Medicines Agency’s (“EMA”) lease catered for an involuntary departure by EMA from the premises by virtue of the alienation provisions and the fact that there was nothing legally preventing the EMA from operating from the premises and complying with its obligations in the lease. On that basis, as the majority of leases contain alienation provisions, it is difficult to see how a different decision could be reached on COVID-19 but, of course, that will be a matter for the Courts.
Alternatively, if a landlord or tenant wishes to consider termination of its lease as a result of COVID-19, it should review whether there is a break clause in the lease which can be operated or if the tenant is in breach, whether the landlord can forfeit the lease.
2. Can a lease be terminated if there is a force majeure clause?
It seems unlikely that COVID-19 will fall within a force majeure clause without express wording as it is arguably not a foreseeable event. However, it will depend on the precise wording of the clause in the lease. In addition, commercial landlords and tenants will also need to consider whether there is a rent suspension clause in the lease but again, it is unlikely that the wording will extend expressly to COVID-19.
3. What action can landlords take if tenants cannot afford to pay rents due to business interruption as a result of COVID-19?
In the usual way, a landlord may forfeit a lease for non-payment of rent either by possession proceedings, if the premises are residential or by peaceable re-entry or proceedings if the premises are commercial.
It may also take any other enforcement steps against the tenant. However, there is already a trend beginning to appear of tenants in difficult situations approaching landlords to seek rent concessions such as a change to the frequency of payments (for example of quarterly to monthly).
No doubt landlords and tenants will open dialogues with each other to discuss particular issues to help tide them over this difficult period. Commercial landlords may have the added incentive not to forfeit leases unless they are able to re-let the premises, as they will become liable for expenses in respect of the property such as business rates (subject to any exemptions).
Of course, the position may change in the coming weeks or months and it has been widely reported that the Government could introduce new legislation to mitigate the impact of the coronavirus outbreak on tenants of residential and commercial property. Yesterday, the Government announced that mortgage companies will give a three month mortgage holiday to those unable to pay their mortgage.
4. If there is a coronavirus outbreak in a building, can a landlord prevent access to the building?
The short answer is no. There will be either a quiet enjoyment covenant in the lease or it will be a term implied into the lease) which prevents a landlord from disrupting a tenant’s use and enjoyment of the premises so the landlord will be in breach of that provision if it prevents access to the building.
However, there could be regulations in the leases (particularly within residential long leases of flats) within a building which enable a landlord to review or update regulations. Following the advice of the Department of Health and Social Care and Public Health England (“PHE”), the landlord may consider amending regulations to, for example, limit access to certain common parts.
5. Will a tenant breach its “keep-open clause” in a commercial lease if it is forced to close or reduce opening hours?
There is likely to be a covenant in the lease to comply with all statutory and Government requirements. This is likely to override any keep open clause in a commercial lease.
If the Government has advised or created new legislation forcing premises to close then there is unlikely to be any action a landlord can take unless there is another breach such as rent arrears for which the landlord can forfeit the lease.
6. What actions can tenants take if they are struggling to pay rent in respect of either residential or commercial premises?
A tenant should seek to open a dialogue with a landlord and discuss a rent concession.
For commercial tenants, they should also check relevant insurance policies which they hold for business interruption to ascertain what cover they have.
In addition, if premises are to be left unoccupied for a period of time, tenants of any premises should consider their insurance policies as to whether or not they are obliged to notify insurers of the closure of premises or their absence from them.
7. What are the duties of freeholders, landlords and management companies to the occupants of residential buildings/estates in respect of COVID-19?
There are existing health and safety obligations on landlords such as legionella risks and gas safety. However, coronavirus is different as it is not linked directly to a building.
Where a single property is let by a landlord who provides no services to that tenant, then it is unlikely that a landlord has any legal obligations to the tenant or other occupiers.
If, however, there are other services such as cleaning or maintenance of other parts of the premises under the landlord’s control, the landlord may have responsibilities to employees and contractors. For further information see this insight with top tips for employers prepared by members of the CRS employment team.
Also, a landlord should check with its insurance broker/insurers as to any specific requirements under block policies.
If there is an outbreak at a building then a landlord should refer to the PHE.
8. What does a landlord or tenant do if there is disruption to postal services or such services are suspended? How does that impact on the service of notices under a lease?
It is important to check service provisions in leases and under statute very carefully to establish whether alternative methods of service can be used such as by hand.
In addition, it is vital that landlords and tenants inform their legal advisers at the earliest opportunity as to likely requirements to serve notices over the next few months so that preparation and planning can be undertaken in case there was to be a disruption to the postal service or to any of the services that are provided by Royal Mail such as guaranteed next day delivery. It is also likely to be necessary to build in extra time to allow for service.
Please contact Laura Bushaway, Rob Highmore, James Souter, Emma Humphreys or any other member of the Real Estate Disputes team for specific advice. This insight is not a substitute for legal advice on the specific circumstances of the case.