What's going to happen to commercial property in the current situation?

The coronavirus pandemic has turned off the lights in millions of offices, factories and shops across the UK. But for many businesses who have switched to home-working the cost of their now empty property will still need to be met. And that dilemma is now causing growing concern among businesses – many of whom have seen revenue totally stop in the wake of the Covid-19 crisis. Today one of Britain’s leading law firms has advised companies with concerns over meeting the cost of commercial leases to hold 'sensible' discussions with landlords as quickly as possible. Harper James Solicitors also advise firms yet to get a plan in place to do so – before it is too late.

They have warned companies should not expect to be able to reply on 'force majeure' as a means to withhold payment. And it is becoming increasingly clear that insurers are refusing to pay out to companies who try and make a claim.

Harper James, who support more than 1,000 small businesses and client nationwide, issued the advice after receiving a number of calls on the issue since the Government started to announce lock-down measures. 

A Harper James spokesman said: “Many companies may think that the pandemic will mean they will easily be able to secure a delay or holiday in the payment of the rent on commercial leases. 

“But this is not the case and companies should be checking their contracts now and looking to enter in to sensible discussions with landlords.”

unprecedented measures included in the emergency Coronavirus Bill currently going through Parliament will mean that no business will be forced out of their premises if they miss a payment in the next three months.

However some experts are already warnign the devil will be in detail of the final legislation as to what conditions need to be satisfied by a tenant in order to be able to exercise these rights.

The proposed measures will last until 30 June 2020, with an option for the government to extend this period if needed.

In the meantime Harper James has produced a special guide and answered some all important questions to firms worried about where they stand:

What happens to my commercial lease if my business has to temporarily close because of COVID-19?

There’s no simple answer to this. Each commercial lease, as an individually negotiated contract will have different terms and different levels of protection for tenants. Start by reviewing the terms of your commercial lease to assess how much protection under the contract you have as a business tenant from the effects of COVID-19 disruption on your business.

Force majeure – what is this and how does it work?

Everyone is throwing that phrase around a lot. A force majeure clause is effectively a provision in a contract that will allow one or all parties to not perform or suspend their obligations under the contract without incurring any liability, if an event that is outside of the control of the affected party occurs.

But be careful. 

Many English law contracts will contain ‘force majeure’ clauses but this is not as common in commercial leases.‘Force Majeure’ is a French law concept and is not recognised under English law – this means that it is very important that a force majeure clause in a commercial lease is specific and sets out clearly what ‘force majeure’ means and what happens if it occurs. Lists of ‘force majeure’ events are often included in contracts to make sure that specific occurrences are captured under the provisions and a tenant can rely on protection if they happen. Examples of force majeure events include war or civil unrest, extreme weather such as hurricanes or earthquakes, fire, floods, compliance with government regulations and epidemics or pandemics (such as COVID-19).

The key point is that because a force majeure clause does not have an English law origin, the meaning will need to have been defined in the commercial lease – typically the meaning will include wording relating to ‘an event outside the reasonable control of the party(ies)’. There is English case law that says if there is no definition of force majeure, then the clause may not be held to be valid due to the fact it is uncertain.

This again leads back to the fact that the impact of COVID-19 on your commercial lease will largely depend on the terms of the commercial lease itself. Some commercial leases contain provisions that state that a business has to be operational or ‘open’ for a certain amount of time. It is possible that due to events outside of a business tenant’s control (such as a government ordered ‘lockdown’), a tenant is unable to open or operate and the tenant may be able to rely on the provisions of a force majeure clause in its commercial lease in this circumstance.

Can I use force majeure as a reason to suspend or not pay rent?

Trying to rely on a force majeure clause as a reason to suspend rental obligations however may be difficult. There are several cases under English law that discuss whether a detrimental change in economic circumstances can be regarded as an event of force majeure making it harder or more expensive for a party to perform its obligations under a contract. Most of these cases follow the principle that it cannot be.

In any case, it will be for the tenant to prove that the event of force majeure directly means that payment of rent is outside of its control (for example because all the banks are shut). One other significant point to note is that the event of force majeure has to be the sole reason that a business tenant is not paying its rent. As a general rule, no other event can occur that causes non-payment at the time of the force majeure event.

Rent free periods and rental holidays: What are your options?

There may be other clauses in a commercial lease that a business tenant can rely on to suspend or reduce rental payments, such as the availability of a rental holiday or a rent-free period or period of reduced rent that the tenant can trigger. Rent-free periods or rental holidays are usually terms that are negotiated into a commercial lease by the landlord and tenant before a lease is entered in to.

Depending on the nature of the relationship of a tenant with its landlord, a business tenant may consider opening up a dialogue with its landlord to discuss the availability of a temporarily reduced rent, monthly instead of quarterly rental payments or a rental holiday while the tenant is impacted by the disruption in connection with the COVID-19 pandemic. This will be a commercial negotiation between landlord and tenant and as such, will not be appropriate or possible in every case. There may also be tax considerations that a business tenant will need to analyse before any rent adjustments are made and it is wise to seek professional guidance before making any changes to the terms of your commercial lease.

What happens if I do not pay rent?

If a business tenant does not pay rent under a commercial lease, then a number of consequences may occur depending on what is drafted in the lease itself. Commonly, if a tenant does not pay its rent when due it may be liable for damages to the landlord and as well as any late payment interest. In some circumstances, continued non-payment of rent may allow the landlord to forfeit the lease or stop the tenant from exercising other rights that it has under the lease or at law. As non-payment of rent can result in detrimental consequences for a business tenant, it is prudent to seek expert commercial property legal advice before suspending any rental payments under your commercial lease.

Will my insurance protect me?

Whether or not your insurance will protect you against the effects of the COVID-19 pandemic on your business will depend on the terms of the insurance policies that you have taken out. Insurance cover, much like the commercial leases themselves, are often individual to the parties that enter into them. Typically, the insurances that may deal with losses due to epidemics, diseases or pandemics are general liability and business interruption insurances, specific crisis management insurances or mitigation insurances but there may be others. If in doubt, it is important to seek guidance from a professional and/or your insurers.  

Latest update from the UK government

At the time of publishing of this article, the UK government had issued guidance setting out the emergency assistance that will be available to business tenants as part of the government’s response to the COVID-19 pandemic.

An overview of the measures is set out here.