COVID-19: A Real Estate Q&A Tenant Perspective

1. If we shut down our property can we stop paying rent to our landlord?

1.1 Save for any express wording in the tenant's lease allowing the tenant to close its store and suspend rent in the event of an outbreak of COVID-19, tenants will be required to continue to pay rent.

1.2 Most leases will only entitle tenants to suspend rent in the event that the premises are damaged or destroyed as a consequence of an Insured Risk. It is unlikely the COVID-19 pandemic will fall within the Insured Risk definition nor will it be easy to establish that it has caused physical damage to the premises, but tenants should nevertheless review their individual leases.

1.3 Force majeure: Whilst force majeure clauses are now rare in modern commercial leases, some more historic leases may contain force majeure clauses and therefore parties should review their leases carefully. A force majeure clause usually provides that upon the occurrence of a specified event, the parties can either terminate a contract or possibly suspend/delay performance of their obligations.

1.4 If a lease does contain a force majeure clause, it is at least foreseeable that subject to the exact wording, COVID-19 (or an enforced quarantine arising from the outbreak) could amount to a force majeure event which may entitle a tenant to suspend payment of sums due under a lease.

Whether COVID-19 will be a force majeure event will depend on the specific wording in a force majeure clause.

1.5 If a landlord closes its premises, it will likely cease to supply any services it covenanted to provide under the lease. Tenants should review their leases to ascertain if there is any right for them to withhold rent in the event that the landlord fails to provide these services.

2. What steps might a landlord take against us if we don't pay the March 2020 quarter's rent?

2.1 In the event that tenants fail to pay rent in breach of their leases, the terms of the lease may entitle the landlord to forfeit the lease (subject to the right not having been waived). Therefore, very careful consideration should be given before a decision is made to withhold rent.

2.2 Landlords may also seek to recover arrears through the County Courts. Alternatively, via CRAR, subject to the statutory limitations and availability of enforcement agents. A further possibility is to issue statutory demands and potentially subsequently winding-up or bankruptcy petitions against tenants.

3. Are landlords obliged to provide tenants with a rent-free period?

3.1 There is generally no obligation on landlords to provide their tenants with either a rent reduction or a rent-free period notwithstanding the downturn in trade.

3.2 However, tenants may wish to approach their landlords to ascertain if their landlords are willing to agree a rent compromise to help the tenants' cash flow. Considering the current climate, in an attempt to keep tenants solvent, landlords may be more amenable to a commercial discussion about a rent compromise. This may take the form of a rent concession, moving to monthly rents or an agreement for rent to be paid in arrears.

4. Is there any other assistance available to tenants?

4.1 Tenants may wish to consider HMRC's Time To Pay Service which may offer arrangements to assist with payment of outstanding tax liabilities. Please also see our Law-Now which provides further details of other tax relief measures.

4.2 The Chancellor set out a package on 17 March 2020 of temporary measures to support business through the disruption. These include:

4.2.1 A 12-month business rates holiday for all retail, hospitality and leisure businesses in England;

4.2.2 Small business grant funding of £10,000 for all business in receipt of small rates relief or rural rate relief;

4.2.3 Grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000; and

4.2.4 The Coronavirus Business Interruption Loan Scheme to support long-term viable businesses who may need to respond to cash-flow pressures by seeking additional finance.

5. The landlord has shut down its property-do its tenants have any potential claims against the landlord?

5.1 Derogation from grant-there is an implied obligation in a lease that a landlord must not derogate from grant. This prevents the landlord granting the tenant a lease and then acting in a way to prevent the premises being used for the purpose for which they were let.

5.2 If a landlord closes its property, which therefore prevents the tenant from trading, it is arguable that the tenant may have a claim against the landlord for derogation from grant.

5.3 However, landlords may be able to defend any such claims on the basis that it was contemplated by both parties that if there was a major incident which involved a serious risk to health, the parties would take steps such as closing the premises, without derogating from grant.

5.4 Frustration- this is a doctrine which can either suspend obligations, or terminate a lease where a supervening event, which the parties have not provided for in the lease, results in a significant change to the rights/obligations of the parties from what they expected at the date the lease was completed. Based on current case law it appears unlikely that COVID-19 will satisfy the high bar that has been set by the Courts to frustrate a lease.

5.5 Tenants should also consider whether any business disruption insurance they hold will allow them to recover losses suffered due to the premises closure.

6. Our lease has a "keep-open" covenant - what are the consequences of breaching this during the Covid-19 outbreak?

6.1 In the event that a landlord elects to close the premises of its own volition, it will be unable to simultaneously seek to enforce a keep-open covenant against a tenant in the premises.

6.2 In circumstances where the Government orders the closure of the premises, it seems likely that the tenant's compliance with any emergency legislation will take precedence over the keep-open covenant. This may depend on the emergency legislation that is brought forward.

6.3 If a tenant elects to close its premises of its own volition, it will likely be in breach of any keep open covenant. However, only in very exceptional circumstances will English Courts order specific performance of "keep-open" covenants. Therefore, if a tenant elects to close a store, the landlord is unlikely to obtain a Court order forcing a tenant to re-open but may have a damages claim.

6.4 To succeed in recovering damages a landlord will need to demonstrate a loss which may be difficult to evidence unless there are turnover-rent provisions in the lease.

7. Do we owe a duty of care to our employees/customers?

7.1 Tenants will owe a duty of care to employees and customers and will need to carefully consider their obligations at common law and under the many statutory codes that govern the safety of the public visiting the premises.

7.2 It is likely that tenants will owe an increased duty of care to those particularly vulnerable groups such as the elderly or those with an underlying health condition.

7.3 Tenants may need to consider enhanced cleaning and should review the guidance on cleaning issued by Public Health England.

7.4 Where possible, tenants should endeavour to adhere to the Government guidance on social distancing. This may include taking steps to ensure that customers remain more than 2 metres away from others.