Covid-19 is here. It is impacting the hospitality and leisure sector both nationally and globally, with restaurants and bars being forced to close in France, Ireland and the U.S.A. It is increasingly likely that such closures will occur in the UK sooner rather than later.
Understandably, tenants will be asking if they can withhold paying the rent, change when they pay the rent or if they can terminate the lease in the event of forced closure of the premises. We provide answers to these questions below.
The March quarter day is looming – can a tenant withhold paying the rent?
In short: no – the rent must be paid without deduction or set off. An outright refusal to pay the rent is a breach of the lease and would leave the tenant vulnerable to enforcement action by the landlord. This is likely to include the exercise of CRAR or the service of a statutory demand as a pre-cursor to winding up or bankruptcy. Worse still, the landlord could seek to forfeit the lease, albeit that would be a less likely option in the current circumstances.
The lease provides for a rent suspension – will this pandemic trigger a suspension?
Probably not. Most modern leases allow for the suspension of rent where the premises are unable to be used (in whole or in part) on the happening of an insured risk. The extension of insured risks to include pandemics or disease is not common, but it is worth checking the lease just in case.
Such clauses also tend to apply where there has been physical damage to the premises and the tenant cannot use them. A pandemic does not cause damage to the premises (it impacts trade), but could feasibly happen if there is a riot or civil commotion, which are typical risks insured by a landlord. Some rent suspension clauses may also be triggered if the premises are inaccessible.
People are referring to force majeure – can a tenant terminate the lease?
The lease should be checked for any tenant break option that can be exercised now. Otherwise, the options for a tenant to terminate the lease are extremely limited.
A modern lease is highly unlikely to contain a force majeure clause permitting the tenant to terminate the lease on notice.
A tenant could argue that the lease should be terminated by reason of frustration. However, recent case law (in the context of Brexit) has reminded us that the bar for proving frustration is high. To be successful, a tenant would have to show that the common purpose of the lease has been frustrated, or that there has been supervening illegality, such that performance of the lease is rendered impossible. These arguments would appear to be difficult in the context of Covid-19.
What can the tenant do to mitigate the economic impact of Covid-19?
Covid-19 is impacting landlords and tenants alike. Most landlords will not want to lose tenants and increase voids in their estates. The best option for tenants, then, is to enter into commercial discussions with the landlord and seek to agree temporary concessions, whether paying rent monthly (instead of quarterly) or agreeing rent holidays. In these difficult times, it benefits landlord and tenants to come to an arrangement that helps both parties.
Tenants should also check their business interruption insurance. The Government has now registered Covid-19 as a “notifiable disease” and some policies may have an extension to cover “notifiable diseases”.
Freeths are advising clients on these issues now. Please contact Adam Boyd for more information.
