Our team: Nick Wood
It would be remiss of us to publish this edition of Quarter Day without an article on the subject that has, in an unprecedented fashion, gripped the globe and impacted every area of our lives.
I am writing of course about Coronavirus (or Covid-19) and I am writing this with a degree of trepidation. I am aware that the situation around us is developing so rapidly that this article may well be out of date by the time it goes to print. I am also aware that a lot of ink has been spilled on this subject already. I am also aware that this will be a sensitive subject for many, who are understandably anxious about the impact it is having. However, this subject has generated an incredible number of enquiries, and so this must be addressed.
Anecdotally the most common enquiry we have had from landlords and tenants is this; does the government mandating the closure of commercial premises frustrate a lease?
This is an understandable question. Cinema, restaurant, gym and pub tenants, for example, may now be legitimately aggrieved to pay rent on premises they cannot legally use. Similarly landlords may be nervous of losing income they were banking on because their tenants have had to “shut up shop”.
The short answer to this question is that it is unlikely that a lease will have been frustrated by the government’s closure of these establishments.
As in the Canary Wharf case last year where the Supreme Court refused to frustrate the European Medicine Agency’s lease because of Brexit, for frustration to arise:
(a) the contract must not have allocated the risk of the particular event;
(b) there must have been a radical change in circumstances; and
(c) the radical change must not be the fault of one of the parties.
Item (a) is unlikely to have arisen because most leases require tenants to comply with statute, placing the risk of statute working against them, on them.
Item (b) is (perhaps surprisingly) also unlikely to have arisen. This is because a radical change generating a frustrating event must have a degree of permanence about it. Medical advice is that, fortunately, the Covid-19 outbreak will decline.
Item (c) may well be the case, but if either of items (a) or (b) are not then any appeal to frustration will fail.
The next question is always this; what about force majeure? In a landlord and tenant context this normally starts a short conversation. Unless there is a force majeure clause in the contract, force majeure will not apply and very few leases contain force majeure clauses. This is because leases by their nature are not contracts for services but are rather contracts creating property estates.
As is noted above, tenants may legitimately feel aggrieved about having to pay rent at a time when they cannot operate from their premises. They will often ask whether there is a rent suspension mechanic that might assist them, in the circumstances. Unfortunately again that is unlikely as rent cessers are usually connected to damage or destruction to premises themselves, rather than to circumstances outside the premises.
In light of the above, it is likely that the parties’ lease liabilities will simply continue to apply.
This being the case, through the cold legal lens of the lease the landlord may consider that it is not for them to finance the tenant’s performance of its covenants.
Tenants should therefore look to their business interruption insurance policies to see if this will assist them. This may well do, given that Covid-19 is now a “notifiable disease” and given that (in some circumstances) closure of premises is now being ordered.
However, given the macro economic climate, landlords may be minded to grant concessions to tenants they like, who have generally performed the lease but are currently unable to do so because of the Covid-19 crisis we are all at least to some extent embroiled in.
If a tenant finds an uncooperative landlord it may consider insolvency processes (such as a CVA) to deal with its liabilities. However, these are time consuming, costly and generate significant negative publicity and as such should be a decision of last resort.
The above relates to simple scenarios where a tenant fails to perform, such as when they do not pay rent. A more complicated scenario would be where tenant covenants conflict; e.g. a covenant to comply with statute might conflict with a “keep open” covenant. In that scenario it is likely that a common sense approach would prevail, but the lease would need to be considered in its entirety to confirm that.
Looking forwards we would make the following high level observations:
This article is necessarily general in terms so carries with it the health warning that many things will turn upon the construction of particular documents. Please be aware of this and, in case of any doubt, avail yourself of legal advice.