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The current public health crisis is rapidly evolving and it has been widely publicised that the UK is only a couple weeks behind Italy, Spain and France in terms of the number of infections.
The pandemic is causing huge socioeconomic repercussions and the UK commercial property sector is not immune. So what is going to happen to property-overheads or running costs of commercial premises if they are closed or access restricted due to Covid-19?
COMMON TENANT CONCERNS (SUBJECT TO INDIVIDUAL LEASE PROVISIONS)
Rent Suspension
The majority of leases will contain provisions preventing tenants from deducting, withholding or offsetting rents. However, any rent suspension clause will probably be linked to ‘insured risks’ or even “uninsured risks”, but which mainly cover physical damage not losses due to diseases or viruses. Thus, the grounds to trigger rent suspension are unlikely to be available in connection with Covid-19; however, the lease provisions should be checked.
Insurance
Businesses with insurance policies that cover pandemics and government ordered closures should be covered, as the government and insurance industry confirmed on 17 March 2020 that advice to avoid pubs and theatres etc. is sufficient to make a claim if other terms and conditions are met.
Termination of leases
The ability to terminate a lease on the basis of an intervening event arises in exceptional circumstances:
- A force majeure clause allows a party to terminate or suspend their obligations when circumstances are beyond their control. These are rare in commercial leases and whether Covid-19 will constitute a force majeure event is subject to the wording of the lease. However, the enforcement of quarantine procedures is likely to be classified as a force majeure event.
- The high bar set by Courts to determine whether a lease has been frustrated occurs in rare circumstances and Covid-19 is unlikely to be considered at present.
- Where premises need to be closed and deep cleaned due to Covid-19 this could arguably constitute physical property damage by an uninsured risk, which could be covered under a rent suspension provisions. This provision is often included in commercial leases.
Ultimately, both tenants and landlords must review their insurance policies to understand what losses can be covered due to business and rental interruption. Landlords must consider their obligations to provide tenant services as they may be in breach of their covenants.
Service Charges
Costs incurred by landlords to combat Covid-19 may be recoverable from tenants. However, this would depend on any exclusions and limitations within a lease such a service charge cap. At present, service charge for empty premises will still need to be paid.
No forfeiture of commercial leases for 3 months
On 25 March 2020 the UK Government pushed through emergency legislation in the form of the Coronavirus Act 2020 which seeks to protect commercial tenants from the forfeiture of their lease by a landlord for a period ending 30 June 2020 subject to possible extension. According to the new Act, this would apply to certain commercial leases.
Rent Payments
The business need to maintain cashflow and look after employees in these times is essential and there are a number of ways both landlords and tenants can look at, and are already, approaching this.
The UK Government is generally advising landlords and tenants to work together to establish affordable repayment plans where possible.
We are here to help both commercial tenants and landlords navigate the current choppy waters and beyond.
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Should you have any questions or queries, please do not hesitate to contact one of our team below who will be able to assist you.
The contents of this article are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this article. © Mundays LLP.