The Pandemic Effect – What now for Commercial Landlords and Tenants?
Despite ‘Freedom Day’ (19 July in England) having come and gone, there’s no denying that city centre offices and high streets are still somewhat depleted of staff and visitors as a result of the massive impact of the COVID-19 pandemic.
It has been well documented that the Work From Home edict has caused a radical change in the way many people work and want to continue working, with the result that many offices are still very quiet. Anecdotal evidence suggests that the return of footfall on the high street is perhaps not what was hoped for by retailers because the increased reliance on online shopping has been dramatically accelerated by the implementation of lockdown restrictions.
All in all, the impact of Covid-19 on the commercial property sector has been colossal. Commercial landlords and tenants are still facing tough times and many are now having to make crucial decisions about their leases.
How easy is it to terminate a lease?
If you feel there is no other option than to terminate your business lease as a result of the Covid-19 pandemic, you will need to act carefully. Whether the contract relates to a commercial property lease or land use, the provisions relating to termination should be clearly set out within the document.
Before giving notice to terminate your lease you should carefully review the clauses that deal with:
- right to terminate and notice of termination
- government intervention
- force majeure
- solvency of the other party
- forced periods of suspension
If you are considering giving notice to terminate a commercial property lease or other type of commercial contract and are unclear about your rights, you should seek legal advice. Under English law, the wrongful termination of a contract may amount to a repudiatory breach by the party seeking to terminate and may have significant consequences.
Likewise, as a landlord, your rights in respect of termination should be clearly set out within your lease. Whilst the Coronavirus Act 2020 offers protection from forfeiture for business tenants, the legal landscape could soon be changing, as the final extension to the provisions is likely to end on 25 March 2022.
It may be preferable to vary or renegotiate certain terms of your lease, than to seek to terminate
If all parties are willing, then negotiating a variation of terms can be an effective solution to a difficult situation. If carried out carefully and with the aim to ensure commercial viability and protections of the parties’ commercial interests going forward, this can help reduce the risk of further disputes arising and enable them to continue trading.
Any contract variation relating to an interest in land will need to comply with the requirements of section 2 Law of Property (Miscellaneous Provisions) Act 1989 and should be properly recorded in writing and executed accordingly.
Renegotiation of terms can seem like an ideal solution to the current problems caused by the pandemic, however, amendments should not be made in isolation and a thorough examination of implications across all arrangements and provisions contained in the contract will need to be carried out.
Contractual variations may have an impact on:
- time limits
- insurance requirements
- related transactions and contracts with other parties, such as subcontractors
- enforceability of security documents, such as parent company guarantees and bonds
What about Force Majeure and Frustration?
The impact of coronavirus has indeed seen many businesses severely affected by circumstances that were outside of their control.
Force Majeure clauses deal specifically with such eventualities, however the question of whether the implementation of lockdown restrictions or other similar measures as a result of the Covid-19 pandemic amounts to a force majeure event, will require a detailed analysis of the force majeure clause. Many such clauses may not contain express reference to a national or global pandemic and it is by no means certain (and even perhaps unlikely) that the inclusion of the general term ‘Act of God’ will cover the impact of Covid-19.
Whether a Force Majeure event has occurred is often a complex legal question requiring a proper analysis of the Force Majeure clause. Not all Force Majeure clauses entitle the parties to terminate the contract and there may be obligations that parties will be required to resume the contract, in full, as soon as conditions allow.
Frustration is a common law principle and occurs when supervening events, outside of the control of the parties, make performance of a contract illegal, impossible or so radically different from what was intended when the contract was made that it would be unfair to hold the parties to their obligations.
While this may sound like a succinct explanation of what happened during the pandemic, the fact that COVID-19 lockdowns made business operations more difficult or more expensive to perform is unlikely to be enough to prove frustration of a contract. However, if performance of a contract would have been illegal, for instance holding an event with 100 people in a restaurant during a period of enforced social distancing, this would be likely to be deemed a frustrating event, bring the contract to an end and discharging the parties from their obligations.
For most commercial property tenants, coronavirus-related frustration is unlikely to be a viable route to free you from your contractual obligations.
Advice for commercial property tenants and landlords
As a direct response to the problems caused by coronavirus, the Government has published a “Code of Practice for commercial property relationships during the COVID-19 pandemic”.
The document sets out numerous principles for commercial landlords and tenants to encourage fairness and promote economic stability. It provides information and suggestions on how arrangements between landlords and commercial tenants can be renegotiated. The guidelines highlight the necessity for all parties to a contract to be transparent, to act in good faith, to provide reasonable explanations of decisions, and the need for flexibility.
The code of practice also acknowledges that each landlord and tenant relationship is unique and that not all negotiations will be able to move forward without mediation or, as a last resort, redress to the courts. The code is voluntary and does not alter the legal position which is that in the absence of a Force Majeure clause or frustrating event discharging them, tenants remain liable for payment of rent and compliance with other tenant covenants in the lease. That said, the Code encourages renegotiation when a tenant is unable to pay as a result of business difficulties caused by the pandemic.
How will the commercial property market be affected in the future?
As more and more companies acknowledge that offering roles providing at least some element of home working is going to be key to their appeal when recruiting, there may be an ongoing fall in demand for office space. With the seemingly inevitable increase in online shopping, our high streets may continue to contain empty retail units for some time to come.
Some landlords may therefore feel the need to change the business use category of their property and recent changes to the classification of a business premises under the Town and Country Planning (Use Classes)(Amendment)(England) Regulations 2020 (SI2020 No.757) may make it easier for property owners to do this without seeking planning permission.
However, no-one can predict the future and while the usage of our commercial centres is definitely changing, the need for effective commercial contracts is not.
Expert legal advice for commercial property contracts is key
Our teams of commercial property solicitors in London and the South act for a range of clients and combine with our corporate and litigation departments to provide a comprehensive service across a range of specialist fields.
Please contact us on 020 7481 2422 to arrange an informal discussion with a solicitor or email email@example.com