Commercial rent moratorium

As the increasing spread of COVID-19 sees growing adherence to social distancing measures, the high streets, retail parks and shopping centres of the UK fall quiet and landlords and tenants alike are faced with exceptionally difficult decisions. 

Tenants may want to reduce their liabilities by exploring options to swiftly and effective exit their lease; landlords are likely to want to avoid rental voids and increased premises liabilities by ensuring that their tenants remain in situ for as long as possible.   

Rent moratorium

Last night the Government confirmed that it would extend the moratorium on lease forfeiture to commercial leases. Tenants not able to make the March quarter day’s rent payment will now no longer face the prospect of their landlord bringing the lease to an immediate end, which in many cases would be fatal to business.

Landlords will inevitably face their own cash flow issues as a result of this new position however it is no doubt expected that they will stand to benefit to some extent from financial measures already announced by the Government in recent days.

It is important for both parties to note that the measures only prevent the landlord from ending the lease on the basis of non-payment rent; they do not interfere with other remedies available for breach of lease.  Furthermore, the tenant has not been given permission not to pay the March quarter rent at all. The moratorium simply acts to provide breathing space in which the parties are expected to sensibly discuss mutually agreeable commercial solutions to see them through the current period of uncertainty.

It is expected that the moratorium will last 3 months, until the June quarter day (24 June) when it will be reviewed in light of whatever circumstances exist at that time.

Can a tenant just walk away from the premises and its lease?

In theory yes, but ending the lease is a different story.

There is nothing to stop a tenant from locking up and walking away but this action alone will not result in the lease being brought to an end. Surrendering a lease cannot be done unilaterally so the actions of the tenant in this way will not end a lease; the landlord will need to accept the action as an event of surrender (e.g. handing over of keys by tenant and acceptance of them by the landlord).  Even if this did happen the tenant would remain liable for all liabilities existing as at the date of the surrender.

Many retail leases will contain “keep open” obligations and tenants would, under normal circumstances, find themselves in breach of such for simply shutting up shop and walking away. Equally, however, most leases also contain a covenant to comply with statutory obligations which, in light of the Government’s recent measures, will presumably override the keep open obligation and prevent a landlord from claiming that a breach has occurred. This point is bound to generate arguments in the coming months.

Under normal circumstances a tenant could not simply fail to pay its rent without fear of the landlord repossessing the premises without notice. As explained above, this is not an option for the landlord at present but even if it was and the tenant was released from its future rent liabilities, it would still remain liable for any arrears (as at the date of forfeiture) and dilapidations. Alternatively where a landlord cannot or chooses not to forfeit, a tenant who vacates will remain liable notwithstanding that it no longer occupied the subject premises.

A tenant may be able to exercise a break option or bring its period of holding over to and end on statutory notice but these options will depend upon the specific lease granted and the particular circumstances.  Furthermore both of these options will depend upon the correct and effective service of the correct statutory and/or contractual notice. Dilapidations will still need to be taken into account unless a release of the repairing and reinstatement liabilities can be agreed between the parties.

Can a tenant rely on ‘frustration’ or on ‘force majeure’ to bring a lease to an end?

Frustration:

In order to successfully claim that a lease has been frustrated and therefore ceased to exist as a contract, the tenant must be in a position to show that circumstances have rendered performance of the contract impossible or that the parties common intentions are no longer aligned with initial expectations. Whilst a tenant may see the present circumstances as exactly the kind of situation that should lead to frustration, the Court has traditionally been restrictive in the application of the doctrine, setting a very high threshold for it to operate. The most recent case, being that of Canary Wharf Limited v. European Medicines Agency [2019] EWHC 335 (Ch) in which the tenant claimed that Brexit would cause frustration of its lease, was unsuccessful.  Whether the recently announced tighter enforcement of social distancing measures will constitute a situation in which frustration could be argued successfully remains to be seen and is certain to be subject to further judicial scrutiny in due course.

Force majeure:

Whether not a tenant can rely on force majeure will depend entirely on the drafting of that particular clause in the lease, supposing that there is one which is by no means certain in modern commercial leases. Even if there were a standard form force majeure clause, whether its wording could be interpreted to allow for circumstances such as the current COVID-19 pandemic to bring the lease to an end would be subject to interpretation. It remains to be seen whether present circumstances see parties negotiating over inclusion of such clauses in the future.

What next?

Overall, it would seem that in the present climate it would be mutually advantageous for both landlord and tenant to find solutions to balance their interests to enable them to survive the present turmoil.  Once through the worst, there will no doubt be a period of re-evaluation of such commercial relationships and restructuring of businesses.

Birketts’ property and restructuring specialists are well -placed to provide you with guidance and support for any matter arising from this ever-changing legal landscape. For more detailed advice on your particular situation either as a landlord or a tenant, please contact Charlotte Wormstone, Legal Director (Property Litigation) in Birketts’ Property Litigation Team, on 01473 403 or 07919 993611.