The COVID-19 virus and Commercial Property Leases

This pandemic is such an unprecedented event, that neither owners of commercial properties nor their tenants have any experience as to how to deal with the numerous issues that arise as a result. There is therefore much to be said about sensible agreements being made between landlords and their tenants, as even the courts have no experience how to deal with situations that may now arise out of this strain of virus COVID -19.

The legal position despite Coronavirus

Rent and service charges will continue to become due, and the landlord will regard the Coronavirus as the tenant’s responsibility to sort out.

Fortunately, there is a moratorium from the date of the Coronavirus Bill until 30th June 2020 during which period the landlords will not be able to forfeit the lease and sue for damages for loss of rent and service charges. However, that moratorium will only defer the payment of rent for that short period of time, as the rent will still be due and the tenant’s debt would have accumulated.

Winding up the tenant company

Instead of going down the forfeiture route, an aggressive landlord could petition to wind up the tenant company. But thought needs to be given whether to proceed in this way. Would it be commercially viable? Does the landlord have another prospective tenant to let out to, or are landlords prepared to take on the void created by the prospect of ranking as unsecured creditors in a winding up and receiving no payment from the tenant company? Would it make more sense for them to reach out to their tenants with an offer to reduce the rent for an agreed period of time, or give a rent-free period, particularly if the tenant has been a good rent payer up until the crises enveloped the entire commercial world? These are some of the considerations landlords will no doubt give before proceeding down the legal route.

Insurance

Tenants should consider their policies to see if they cover such eventualities. Most insurance companies do not appear to cover the COVID 19 virus, and if the pandemic is not covered there may be little or no possibility for the tenant to obtain some remedy for the non-payment of rent and service charges, other than by agreement with the landlord.

Frustration

It is unlikely that a lease can be said to be frustrated as a result of COVID-19. If there is a break clause event all well and good, but if not, unless the tenant can successfully argue that the crises has destroyed their business and their only one client has been totally incapacitated by the crises and is unable to continue to give them business, there would not appear to be a way of handing the lease back based on frustration and walking away.

It is also unlikely a lease would have a ‘ force majeure’ clause ( an act of God), permitting termination. There are no cases in the higher courts in the UK concerning a situation where a commercial lease has been successfully frustrated due to an ‘ act of God ‘ but perhaps now is the time for a test case.

Retention of the deposit by the landlord as rent due may be acceptable, but unless it is agreed that the lease is frustrated and the tenant has to leave before the next quarter date rent becomes due, the tenant would have to make good the retained deposit taken as rent.