COVID-19 has created unprecedented pressures on all businesses, large and small. What are the leasing considerations for landlords and tenants during the COVID-19 crisis?
Lease obligations are a major expense for any business and a source of huge potential liability, not only for the entity that signed the Lease, but also for any individuals who have signed personal guarantees.
Everybody’s individual situation will depend on the wording of their particular Lease. The following observations are general only in nature and meant to provide an overview of the possible issues to be considered in light of the pressures created by the COVID-19 pandemic. It is essential that all Landlords and Tenants consult their solicitor to gain a proper insight into their individual rights and obligations.
Generally speaking, a Landlord is obliged to allow their Lessees access to and quiet enjoyment of the Premises that are leased.
If the Landlord fails to do this, except due to default by the Tenant, they are arguably in breach of their obligations under the Lease. Leases often also provide that rent will abate (the Tenant is not required to pay) whilst a Tenant cannot reasonably access or use the Premises. This however is generally only applicable in circumstances where the Building has been damaged in some way.
If a Landlord elects to prohibit access, it is possible that these abatement provisions could apply, but it depends on the wording of the Lease. If they do apply, the Tenant should be able to stop paying Rent until access is granted.
If the Premises are in a retail shopping centre, the provisions of the Retail Shop Leases Act may become relevant. The Tenant may be able to apply for relief and other protections, depending on whether the Landlord has acted reasonably in deciding to close the centre and whether there is a direction to close made by an appropriate Authority.
Unless the Lease specifically contemplates the closure of the individual business by the Tenant, it will be difficult for a Tenant to unilaterally decide to close without finding themselves in breach of their Lease. Most Leases will contain a requirement for the Tenant to trade, to remain open during the hours set by the Lease and to continue to pay rent, with penalties applying where a Tenant fails to do so. These provisions would likely continue to apply whether a Tenant elects to cease trading, and the Tenant would be in breach of the Lease.
Leases often also contain provisions around the need to report infectious diseases and adhering to health and safety procedures. Such clauses will require a Tenant to comply with any direction of an Authority. Complying with an order to cease trading would be such an order. Generally, a Tenant, whilst being obligated to comply with those orders, would not receive an abatement of rent during any closure period.
So what does all this mean?
Any closure of premises, whether by choice or by order, could possibly result in one or both parties failing to comply with varying clauses within the Lease. This could result in a party being in breach of the lease, potentially giving the other party the right to terminate the lease and claim damages.
The nature of the COVID-19 outbreak is so unusual that it would be rare for any current Lease to contain provisions specific enough to deal with it’s ramifications.
What practical steps can be taken?
Landlords and Tenants will need to take a practical approach to dealing with the impacts of COVID-19. Beyond direct breaches of any Lease agreement, Landlords will need to consider the effect of COVID-19 on the economy in general and both the Tenants’ ability to continue to pay rent and Landlords’ ability to re-let any premises which become vacant as a result of any Lease termination.
In the first instance, we recommend both parties seek advice under their respective insurance policies. General advice from insurers suggests that most insurance policies will have an exclusion for interruption due to any disease declared to be quarantinable under the Biosecurity Act 2015. COVID-19 was listed under that Act in January 2020.
Cover may arise under some policies via an extension known as “Prevention of access by a public authority” or other variations. This cover may be useful if a closure is ordered. Landlords may be able to rely on rent default cover if their tenant is unable to continue to pay rent. Of course, each insurance policy is different and cover will depend on how the particular extension is worded and any other policy terms, conditions and exclusions.
We recommend a legal review of your Lease to determine the position of both parties and whether there are any provisions which can be relied upon.
Other practical steps
The parties should speak to one another about their respective positions. Some practical ideas to assist with rent payments could include:
- The granting of a rent-free period (either a full or part rent relief) so that the Landlord retains their Tenant on a long term Lease and the Tenant remains able to continue to meet its Lease obligations;
- The granting of a deferred rent relief which could be recovered once it is ‘business as usual’ again;
- Payment of rent on a more frequent basis (i.e. weekly rather than monthly);
- That rent is permanently or temporarily converted to a turnover-only basis.
In all circumstances, any agreement reached should be recorded in properly drafted agreements to avoid later disputes and misunderstandings. The team at DBL Solicitors are open for business during this unprecedented time. We are available for advice over the phone and via video conference where required.
Please do not hesitate to contact us with any leasing queries.