How to Handle Real Estate Lease Challenges as a Result of COVID-19

Many occupiers that now find themselves in challenging financial circumstances are opening discussions with their landlords as to possible relief from rental payments. There are no rules as to how matters may be revised.  Some tenants have sought an agreement not to pay the 25 March and / or 24 June Quarter Day rent. That is not to say that they are necessarily seeking a complete waiver but an ability to pay later.

This could be arranged by say, increasing the rents payable on the, September and December Quarter Days to make up the shortfall on the calendar year but any sort of payment restructuring is possible.  Other approaches may be to move temporarily onto monthly payments or perhaps waive one or more quarter’s rent and add it to the end of the lease.

A more complicated restructuring might involve the grant of a rent-free period in return for a higher headline rent until the next rent review or maybe amending covenants in the lease which will be of benefit to the landlord.   

Generally, experience suggest that many landlords are amenable to helping their tenants if they are actually in distress.  Having said that investors usually have liabilities to lenders and so they are not all in a position to offer help and will be keen to keep rent receipts flowing if possible.   

It is worth bearing in mind that some landlords are not be an investor but in fact a head tenant who has sublet surplus space. In those circumstances different criteria will apply and there is less scope for a restructuring deal. It may be that the non-payment of rent by an occupying tenant will preclude the head tenant from paying the rent that it owes upstream to the head landlord.  There is also an issue whereby any alterations to the subleasing arrangements usually require the head landlord’s consent and so a restructuring deal could be delayed or even blocked.

If you are engaged in current rent review negotiations, the advent of COVID-19 presents an opportunity for both landlords and tenants to revisit the relationship and reach a settlement of mutual benefit. This could involve a wider restructure of the lease.

Leases generally do not allow a tenant to withhold rent except under certain circumstances such as the premises being damaged or destroyed by an insured risk.

It seems unlikely that the closure of a property due to Covid-19 without there being physical damage would be a valid ground for a tenant to stop paying  rent. A tenant that chooses to stop paying their rent is technically in breach of the lease.  The rent is not waived under the Coronavirus Act and a tenant will be expected to make good any arrears by agreement with their landlord. In most cases late payment of rent will incur interest.

Albeit precluded temporarily in most circumstances from using traditional remedies for non-payment of rent (see comments under “legislation”), including forfeiture, a landlord may opt instead to pursue any guarantor, or could draw down on a rent deposit in lieu of payment if that is in place.

The government has recently extended the existing retail rate relief scheme in England with similar extensions being introduced in Scotland and Wales. The relief has targeted retail, hospitality and the leisure sectors which has resulted in the rates demand for 2020/21 being reduced to zero.

Unfortunately to date the government has not introduced any new reliefs to assist office occupiers. However, with change comes opportunity and we believe it may be possible for office occupiers to reduce their rates liability. We have taken counsel’s opinion which supports our view and as a result we are recommending that properties are appealed and a review of the office occupation during this period is undertaken. We recommend that this action is taken immediately. 

Occupiers may have business interruption insurance. If so it is possible that the Government’s order effectively closing buildings under the current emergency might trigger a valid claim.

Occupiers should check with their landlord or their agents, as well as the terms of their lease, to understand what obligations need to be fulfilled in relation to security, occupation and notification.

Most leases contain provisions whereby the parties must comply with all statutory directives, so if the Government has effectively ordered the closure of buildings this may have an impact on provisions such as “Keep Open” clauses.

Leases do not generally contain a force majeure clause. 

Such provisions relate to the occurrence of  specific events (e.g. an earthquake) and in those circumstances the contract may be affected or even terminated.  However, the impact of COVID-19 is not a specific event but an unfolding pandemic and so it is unlikely to fall into the definition of force majeure and create a ground for the waiver of rent.  Similarly, it is unlikely to allow the suspension of services by a landlord unless there are specific exclusions in the lease.

The Government passed the emergency Coronavirus Act on 25 March 2020.

Specific provisions relating to commercial leases provide that a right of forfeiture for non-payment of rent cannot be enforced during the “relevant period“.  Currently that runs until 30 June 2020 but it may be extended subject to the longevity of the virus.  As things stand the liability to pay rent on both the 25 March Quarter Day and the 24 June Quarter Day are covered.  In the legislation rent is defined as “any sum a tenant is liable to pay under any relevant business tenancy”. Therefore, service charges and insurance are also likely to be included.

The government has also announced it will introduce temporary measures to safeguard against aggressive debt recovery from commercial tenants. 
Statutory demands and winding-up petitions will be banned and the use of CRAR (commercial rent arrears recovery) will not be allowed.

Frustration of a contract is the law’s method of allowing parties to be relieved of their legal obligations under a contract where it has become impossible to perform.  Typically, an event has occurred which is unprovided for in the lease and significantly alters the parties’ obligations thereby bringing the lease to an end.  

The bar for termination of a lease by frustration is high.  In the recent case of Canary Wharf v European Medicines Agency 2019, the Court held that Brexit did not frustrate the lease and EMA remained liable.

It therefore seems unlikely that a tenant could argue that a lease has been frustrated by the advent of COVID-19 under current legal precedent.

Where a tenant holds a lease contracted outside the Landlord & Tenant Act 1954, which means it does not have security of tenure, and is planning to vacate on or before the contractual expiry date but prevented physically from doing so by the virus, it may need to discuss with the landlord an appropriate temporary extension.

If a landlord incurs additional costs in running your building or a surrounding estate, such as deep cleaning or the provision of sanitising equipment, those costs will generally be recoverable under the service charges.

However, during the course of the pandemic buildings have seen security and maintenance staff laid off and are not being serviced to the usual extent. Therefore, savings may be available to occupiers when service charge accounts are reconciled and audited in due course.

Current circumstances give landlords and their managing agents the opportunity to review current levels of service charge expenditure to see if reductions can be made due to low, or non-occupancy of buildings. Items can include utilities, cleaning, non-essential services and maintenance, and in some instances staff members being furloughed. However, it should be noted that generally buildings cannot be completely shut down due to the complexity of the plant and machinery but running times can be revised. Each service charge assessment needs to be looked at on a building-by-building basis, and will be subject to further review as phased or full occupancy measures are put in place.