The COVID-19 pandemic has raised concerns for both landlords and tenants in respect of obligations arising from their commercial leases. New COVID-19 restrictions were announced by the Government on 24 March 2020, including the closures of non-essential retail businesses and facilities. Here, Aidan Marsh outlines the options open to landlords and tenants.
- Communication between tenants and landlords is more important than ever.
- Tenants do not have a general right to withhold rent, but landlords may agree to a rebate of charges for services such as cleaning & maintenance.
- The forced closure of businesses may give rise to breaches on the part of tenants & landlords.
- How can parties get out of their commercial lease?
First and foremost, a clear line of communication should be established between the parties and the best outcome for both parties may involve a little compromise. The ability to be flexible may be dependent on the landlord or tenant's position with their own banks or lending institutions, notwithstanding the potential for up to a 3-month mortgage holiday period. If a temporary arrangement is agreed, this should be documented by way of side letter to protect the interests of both parties and to ensure that the terms agreed are clear. Such a side letter should also confirm that the lease in all other respects stands and remains binding.
Suspension of payment of rent
Tenants are likely to request a rent concession or a rent-free period due to the effect COVID-19 has, and will continue to have, on their business. Even during this pandemic, there is no general right for tenants to withhold rent and it must continue to be paid irrespective of any financial hardship, temporary or otherwise, unless mutually agreed between the parties. A unilateral decision by the tenant to withhold all, or part of, the rent in the coming months would amount to a breach of covenant under the lease.
Suspension of service charges?
With the closure of non-essential retail businesses and facilities, certain services, such as cleaning and maintenance, can no longer be provided by landlords in respect of premises forced to close. In such circumstances, a tenant may request that the service charge, insofar as it relates to the suspended services alone, is also suspended until such time as the premise is reopened and the landlord resumes providing the services. Insurance contributions and other outgoings would, however, continue to be payable.
Breach of Covenant
The restrictions announced by the Government do not automatically entitle parties to breach their covenants and obligations under a lease. Landlords cannot unilaterally cease to provide services and essentially shut down the common areas (e.g. in a shopping centre) which tenants (where the business remains open) have a right to use. Such a decision would amount to a breach of the covenant allowing the tenant to have quiet enjoyment of the premises. The obligations remain enforceable against the parties even if their performance becomes more difficult. It is important to check if the lease contains guarantee provisions. In the event that a tenant breaches a covenant, a guarantor steps into the shoes of the tenant and becomes liable for the tenant's obligations under the lease.
Keep Open for Trade
Another concern is the indefinite duration of the closure of non-essential retail businesses and facilities. Most leases contain an obligation to keep the premises open for trade and not leave the premises unoccupied for a prolonged period of time. The Government published an indicative list of what it considers essential retail outlets. Should a tenant make a unilateral decision to close the premises, without Government direction, this would amount to a breach of covenant and may lead to the landlord exercising the right to forfeit the lease.
A lease can be terminated where a break option is contained in the lease. Break options vary in each lease and the right to break may be a mutual right of both parties or a right of one party only. Many break options contain conditions which can be difficult to satisfy, and some include the payment of a penalty. Break options can require a notice period to be served and the parties must still comply with the lease until the end of the notice period. Break options must be complied with in full to ensure that parties can terminate the lease.
Force majeure & frustration
Force majeure is generally defined as an unavoidable or exceptional event which results in one or both parties being unable to perform their obligations, in accordance with the contract. Most leases, however, would not include a force majeure clause.
Absent a force majeure clause, it could be claimed that the contract has been frustrated. This is on the basis that performance has been rendered impossible due to an unavoidable change in circumstances. The onus to establish that the lease has been frustrated is very high and the effect of proving frustration is the termination of the lease in its entirety. See here Beauchamps' article on contractual issues in the context of COVID-19.
We have provided a general overview of the issues that may arise, however each case turns on its own facts and a full review of the lease and ancillary agreements should be carried out.
For more information please get in touch with Aidan Marsh (Commercial Property).
To discuss any other COVID-19 related issues impacting your business, please get in touch with Barry Cahir (Litigation and Insolvency), Thomas O'Dwyer (Litigation), Sharon Delaney (Litigation), Dorit McCann (EU, Competition & Procurement), Damian Maloney (Corporate and Commercial), Aidan Marsh (Commercial Property), Gerry Gallen (Commercial Property), Sandra Masterson Power (Employment), Paul Gough (Employment), Edward Evans (Corporate & Commerical), Fidelma McManus (Housing) or your usual Beauchamps contact.