Sarah O’Mahony: Practical considerations for both landlords and tenants
Sarah O’Mahony, associate in the real estate team at William Fry, explores the challenges ahead for landlords and tenants of commercial property.
As a result of the COVID-19 outbreak, landlords and tenants of commercial property have had cause to closely consider their respective obligations under a lease. Many businesses have closed, whether pursuant to a directive from Government, to safeguard staff or because of a huge fall off in trade.
A lease is a contract between the parties and, failing the enactment of specific legislation altering the relationship between landlords and tenants or relieving either party from their lease obligations in light of COVID-19, the provisions of the lease remain fully in being.
We consider below some of the key questions being posed to us so far in the context of COIVD-19:
Can a tenant stop paying rent or reduce the amount of rent it is obliged to pay?
Unless the lease provides for a scenario like COVID-19 (which is highly unlikely) a tenant does not have an entitlement to withhold rent or seek a rent reduction.
A unilateral decision by the tenant to stop paying rent (or pay less rent) would constitute a breach of covenant, which gives rise to a number of actions available to a landlord, including:
- an action for recovery of rent arrears;
- claims against lease guarantors;
- recourse to rental deposits; and/or
- forfeiture of the lease.
Does rent suspension apply as a result of the COIVD-19 outbreak?
In most leases, rent suspension provisions in a lease will only apply where there has been damage or destruction to the premises by an “insured risk” or, in the case of more modern leases, an “uninsured risk”. While each lease will need to be reviewed on a case by case basis, as there has been no physical damage or destruction to the premises resulting from the coronavirus outbreak, the rent suspension provisions of the lease will not apply, even if the tenant is unable to occupy its premises.
Can a landlord unilaterally decide to close the premises?
If a landlord elects to close its premises (e.g. a shopping centre), a tenant could argue that the landlord has breached the covenant to provide it with quiet enjoyment. However, if the landlord’s decision is consequent on legislation enacted by the Government or a Government decree, a different analysis would apply.
Can a tenant terminate the lease as a result of the COVID-19 outbreak?
There is no implied right to terminate a lease and neither would force majeure or the doctrine of frustration apply in these circumstances.
Force majeure is where a party seeks absolution for non-compliance with an obligation due to a significant, unexpected and unavoidable course of events or an “act of god”. While many business-critical commercial contracts contain force majeure provisions, such clauses are uncommon in a modern commercial lease. Further, a court is unlikely to imply such a provision into a lease. As such, it is unlikely that either a non-performing landlord or tenant could defend non-compliance based on force majeure.
A contract is deemed to be frustrated where an unforeseen event makes it impossible for the contract to be fulfilled or the rights and obligations of the parties have become “substantially different” from those envisaged at the outset. The threshold to succeed with a frustration claim is notoriously high and, in the context of a lease, it seems unlikely that the COVID-19 outbreak represents an event of frustration, given that the closure of the premises is likely to be temporary.
Both landlords and tenants should also bear in mind that the lease might contain an express right to break the lease on a specified date. In such instances, parties are reminded that they should closely adhere to any pre-conditions for the valid exercise of a break option.
Can the parties rely on insurance?
Both landlords and tenants should closely examine their individual policies of insurance to determine whether loss of rent, losses arising from business interruption and losses from “infectious diseases” or a similar risk is covered.
In conclusion, all leases are different and should be considered on a case by case basis. Clearly both parties will benefit from working together through these unprecedented and challenging times which will, hopefully, be short term in nature only. Any arrangements entered into should be documented to avoid any future disputes between the parties.