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COVID-19: The impact on existing and future leases

Property owners need to consider the effect of the global pandemic on their portfolios.

The action required will vary depending on whether you are looking at an existing lease, or are in the process of negotiating a lease. 

Force majeure?

Leases generally do not contain force majeure clauses, which are commonly included in other commercial contracts to enable one or both parties to exit the contract following the occurrence of certain events, which are outside the party’s control. In the absence of an express force majeure clause, the doctrine of frustration may apply.

Frustration?

If a contract is frustrated it is brought to an end. However, it is of very limited application and will only apply when something occurs, after the contract has been entered into, which renders it impossible to fulfil, or transforms it into something so radically different that it should be brought to an end. It is notoriously difficult to prove that a contract has been frustrated. The recent attempt by the European Medicines Agency to have its lease declared frustrated by Brexit, failed. Whilst there are no bans on premises staying open, it is hard to see how a tenant could successfully argue frustration. However, there may be scope for a tenant if the demographic to which it provides services, for example, is following government guidance to self-isolate. However, given that the issues around COVID-19 are thought to be short-term, many tenants may not actually want to consider lease termination.

Rent suspension?

Instead, they are likely to be looking to see whether they can stop paying rent whilst they are unable to operate normally. Rent suspension provisions are generally linked to physical damage or destruction to the property, or the means of access and egress to it. Therefore, tenants are not going to be able to find a contractual basis to stop paying rent under current leases. Tenants who pay turnover rent will be compensated, to some extent, by not having to pay a full market rent. They should, however, be mindful of any minimum payment provisions, which could still leave them paying material sums at a very difficult time.

Common parts

Although tenants are unlikely to benefit from rent suspension, they may find that common parts are closed. Generally, leases will allow landlords some flexibility to close common parts in cases of emergency - COVID-19 is likely to qualify. However, given that access could be cut off for some time, and this could prevent tenants from accessing their premises, tenants will feel aggrieved at not having the rent suspended.  Many leases will at least guarantee tenants access, either 24/7 or during “permitted hours”.  If this landlord obligation is breached tenants may find themselves with some basis for a claim/compensation.  This is unlikely, however, to enable tenants to lawfully withhold rent.

Concerns about office closures, particularly those to which the public requires access, may also have an impact on covenants by tenants not to leave the premises vacant for longer than a specified time period. Tenants may also find that they have to pay a higher service charge, owing to deep cleaning that has to take place, where cleaning is included as a head of service charge.

Health and safety requirements

In terms of health and safety requirements, it is also worth revisiting the legal duty of care under the Health and Safety at Work Act to ensure the safety of employees or non-employees in the work place in light of the COVID-19 outbreak. This will include carrying out a COVID-19 risk assessment which will depend partly upon the use of premises, current cleaning and hygiene arrangements and other (possibly external) factors. It is likely that such a risk assessment will need to be regularly reviewed given the changing nature of the guidance available. There is up-to-date guidance on the Public Health England website for health professionals and other organisations. 

What should parties be doing?

We are in unprecedented times, for which commercial leases do not cater. Landlords and tenants are going to have to work together to find a mutually workable solution. Landlords who do not give tenants some leeway, are likely to find tenants in financial difficulties which will then have an impact on their rental stream.

Parties negotiating leases now should be considering:

  • Should a force majeure clause be included in future leases?
  • Should rent suspension apply if certain circumstances arise that are not linked to damage or destruction to the property, for example if a certain percentage of a workforce becomes ill, or if government advice is for a certain percentage of the population to self-isolate?
  • Alternatively, should the tenant be able to break the lease in the above circumstances?

However, the commercial reality is that, where parties are not already bound to complete a lease, they are likely to suspend negotiations whilst the current crisis unfolds and resolves itself.

We will all need to work together to get through this and a new partnership between landlords and tenants isn’t just desirable, it is likely to become a necessity.

At TLT, our real estate teams remain ready to assist where we can.

Contributor: Alexandra Holsgrove Jones

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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