How will coronavirus affect commercial leases?

Robert Lusher, Partner in the Russell-Cooke Solicitors, real estate, planning and construction team.
Robert Lusher
5 min Read

The outbreak of coronavirus is affecting all aspects of life. Commercial property is no exception. The Government's current advice to minimise social contact, close certain venues and where possible work from home is impacting both business tenants and landlords alike. In this briefing we set out the answers to the most common questions we are being asked:

As a tenant, do I still need to pay the rent?

The short answer is probably yes, unless your lease or tenancy agreement allows for rent suspension in the current circumstances. Of course these circumstances are unprecedented so that is unlikely. The requirement to pay rent is usually only suspended where there has been damage to the premises by an insured and (in some cases) uninsured risk. The definition of what amounts to an 'insured risk' or 'uninsured risk' would need to be reviewed carefully but generally speaking the rent suspension provisions would only be triggered by damage to, or destruction of, the fabric of the building.

However, as from 5 March 2020 COVID-19 (caused by the coronavirus) became a notifiable disease. It would therefore be advisable to check your business interruption insurance policy to see whether rent is recoverable under it.

Could I terminate the lease, or could my obligations under it be delayed/suspended?

Terminating a lease on the basis of 'frustration' or 'force majeure' seems unlikely.

Frustration: to argue this you would have to be able to show some form of intervening illegality or failure of common purpose that renders performance of the lease impossible or so radically different from the parties' expectations that frustration is justified. The threshold test for frustration is very high and there has never been a reported case of it in England and Wales. The land held under the lease will nearly always be capable of 'enjoyment' in some form, even if this becomes difficult/impossible for a period of time. So the frustration here is likely to be temporary.

Force majeure: such clauses usually state that the parties can either terminate a contract or possibly suspend/delay performance of their obligations upon the occurrence of a specified event. Although force majeure clauses are quite commonly used in commercial contracts they are far less common in modern commercial leases. Once again, check the terms of the lease but this is unlikely to be a viable option in most cases.

As a landlord, should I be closing the building?

A number of landlords are going to be faced with the unwelcome news that the occupiers of their building (or perhaps staff working in the building) have tested positive for COVID-19. In such circumstances, are you entitled to close the building?

In the majority of cases (and at time of writing) the answer is probably no. Most leases contain a specific landlord's covenant allowing the tenant to 'quietly enjoy' the premises. Consequently, if you unilaterally decide to close the building you could be faced with a claim for breach of covenant and/or derogation of grant which could include a claim for loss of income.

However, if the Government or a regulatory authority (such as Public Health England) required the closure of certain buildings then this is likely to be a sufficient defence against a tenant's claim for derogation of grant or a breach of the quiet enjoyment covenant.

As a landlord, if I can't close the building, what should I be doing?

Although tenants are responsible for health and safety in relation to their own premises, as a landlord you are under a general obligation to protect the health and safety of your tenants and visitors to the building. As such you would be well advised to introduce reasonable regulations regarding the management of the building and the common parts. These could include limiting access to the common parts of the building which are not required for access, providing hygiene notices and facilities and asking occupiers to comply with Public Health England’s best guidance.

Most leases of multi-let buildings will require the landlord to provide key services (such as ensuring the building is structurally sound) but the provision of other services is likely to be at your reasonable discretion. As such, it may be reasonable during these times to increase the frequency of cleansing of the common parts. On the basis that the extra costs are reasonably incurred (and in accordance with the principles of good estate management) it is likely that such costs would be recoverable under the service charge regime.

As a tenant, can I close the premises?

It will depend on what the lease says but most leases do not require the tenant to remain in physical occupation and to trade from their premises. So you are probably entitled to shut down the building. If a lease does have a 'keep open' covenant there may be exceptions to it – such as where it is unlawful to do so. As such, if the Government required closure of the premises, then the tenant is unlikely to be in breach of its keep open covenant in such circumstances.

If the lease does contain a keep open covenant and the tenant closes the premises of its own volition, the landlord is unlikely to be able to obtain a court order for specific performance (i.e. forcing them to re-open) but it may have a claim for damages (particularly if the lease contains turnover rent provisions).

The coronavirus outbreak means we are all faced with unprecedented challenges. Regardless of whether you are landowner or an occupier it will be important to keep abreast of the Government's guidance, maintain an open dialogue, and if making decisions based on the advice at the time, keep a note of the reasoning behind your decision and where possible obtain agreement to those decisions. Collaboration rather than confrontation must be the approach in the first instance.

Briefings Real Estate Russell-Cooke Rubert Lusher commercial leases leases real estate landlord tenant