The global pandemic caused by Covid-19 has meant that many tenants have looked in detail, possibly for the first time, at their lease of commercial premises. This has no doubt been spurred by the imposition of lockdown and the inability to trade causing a massive loss of income but with rent still being demanded by an unsympathetic landlord. How might this scenario be avoided in the future?
We have previously commented on issues such as force majeure and frustration. Now we look at what could be done in a new lease or a renewal lease to specifically cater for the scenario outlined above.
The answer is a clause that specifically deals with the suspension of rent (and if it can be negotiated service charge and insurance rent) in the event of a future lockdown.
The clause will need to:
- Define precisely what the event that triggers suspension is e.g. Covid-19 (what if Covid-20 comes along)? The landlord will want a narrow definition; the tenant will want something wider such as pandemic / epidemic.
- Define what governmental step triggers the suspension e.g. the tenant cannot lawfully use the property / part of it or cannot gain access to it e.g. if it is in a shopping centre which is closed.
- Decide what is to be suspended – rent / service charge / insurance rent.
- Decide how long the suspension will last – until the end of the restriction or for a fixed period.
- State what happens if the fixed period expires but lock down is in place- does payment resume or can the lease be brought to an end.
Possible sticking points:
- Suppose on a renewal of a protected lease the tenant wants a suspension clause in it. The landlord does not. Ultimately a court could be asked to decide the terms of the renewal. Would a court impose such a term as part of ‘necessary updating’ – that remains to be seen.
- What about the landlord’s lenders – are they likely to be willing to authorise a lease that potentially provides no rental income for 6, 12, 18 months?
- Would the landlord’s insurers cover the shortfall? Any policy will have to be checked carefully. Insurers have shown little voluntary appetite for Covid related claims
In what is anticipated to be buyer’s market at least in the short term, tenants whether renewing or entering in to new leases should negotiate hard on these points. It seems likely there will be a second wave of Covid-19 and there is a real possibility of future pandemics and epidemics
If you need advice on these issues please do not hesitate to contact us.
This blog was written by: Michael Stewart
DISCLAIMER: Please note that this post sets out the general position under the general law. It should not be acted upon in any specific circumstances without taking specific legal advice as to those circumstances. Also, it should not be relied upon, acted upon or treated as a substitute for specific advice relevant to particular circumstances. If you do require specific advice please contact us for assistance.