Leases of commercial premises – Covid 19 impact

In this month’s article, I wish to write about an issue that may well be relevant to those construction businesses that rent commercial space. One of the key questions that has been concerning lawyers amidst this Covid 19 pandemic, is what impact it has upon a tenant’s responsibility to pay rent to landlords. 

Certainly at Level 4, (we are now at Level 3 at the time of writing), there will be many construction businesses which would not have been able to access their leased commercial premises and certainly not have been able to continue their core business. 

The general position under a commercial lease is that a tenant must continue to pay rent and is prevented from exercising any right of set-off as against the Landlord. The Tenant is typically required to bring a separate claim against the Landlord for a claim that rents ought to be reduced, generally by way of arbitration. 

But Covid 19 has brought unprecedented times, and it is apparent that the legal position has been affected. The two legal concepts that have relevance in this instance are primarily “frustration”, and to a lesser extent “force majeure”. 

Frustration can be summarised as applying in circumstances where a contractual obligation has become incapable of being performed, because the circumstances in which performance is called for, would render it a thing radically different from that which was undertaken by the contract. 

Force majeure clauses are contractual mechanisms to deal with the events which are beyond the reasonable control of a party. The “no access” provisions contained in the latest versions of the ADLS lease are examples of this type of clause. 

Clauses 27.5 and 27.6 of the ADLS Sixth Edition 2012 Deed of Lease may give some relief to tenants as against the effects of Covid 19. These clauses fall under the head “No Access in Emergency”. They provide for a rent reduction in certain circumstances where a tenant is unable to access the leased premises in an emergency, and a right of termination if the non-access is to continue for an extended (agreed) period. Their origin was the Canterbury earthquakes where access to some buildings was limited even where no damage had occurred. 

It is highly likely (where you are renting premises pursuant to this form of lease), that these clauses will be held to apply at level 4. This is because:

  • Covid 19 is an emergency as the definition includes “epidemic”;

  • Tenants have been unable to gain access to fully conduct the Tenant’s business from the premises;

  • The reason that Tenants could not gain access is because of the safety of the public or the need to reduce or overcome any hazard or harm. 

Once the no access threshold was met, it follows that a fair proportion of the rent and outgoings shall cease to be payable for the no-access period. 

What is a fair proportion of the rent and outgoings? 
A “fair proportion” is likely to vary according to the facts and circumstances. Factors that may be considered could include:

  • The balance of the lease;

  • Whether it is for bare land, retail, offices, warehousing or industrial sites;

  • Whether the Tenant is able to conduct business remotely using servers or other equipment based at the premises;

  • Value inherent in the premises even while not in use, including storage, goodwill (associated with a particular site) and continuity; and

  • Rights of termination if the non-access continues. 

Whilst factors such as the Tenant’s ability to trade remotely/the impact on the Tenant if it were required to pay the rent/the impact on the landlord if rent were withheld, may be relevant to the matrix in which the Landlord and Tenant are negotiating, they are not factors that typically would be considered in determining what is a fair proportion of rent to be paid. 

Landlords and Tenants should seek to reach agreement upon what ought to be paid for Level 4 and Level 3 Covid 19 impact. There will be situations where agreement is not able to be reached. Typically the dispute resolution processes retained in the standard leases such as arbitration may prove too costly for resolving these issues, where non-access is limited to 4 -6 weeks. Significantly though for Tenants, the No Access clause enables rent abatement before embarking upon arbitration under a standard ADLS lease. 

There are two other prevalent types of Commercial leases, (BOMA/Property Council lease), and at least in the Property Council lease rent abatement may apply where premises are “substantially inaccessible” albeit this must be determined by the Landlord. The most recent Property Council lease also applies an abatement which is limited to the level of insurance compensation that the landlord obtains in the circumstances. 

The reality is that both Landlord and Tenant need to look beyond the monthly rental obligation when considering what a fair reduction in rent might be. The goal of retaining a good landlord/tenant relationship which if fairly managed could survive the many years to come, should outweigh any short term gain involved in ensuring the rent is met in full (from a landlord’s perspective), or that a large discount is applied to ease current cashflow constraints (from a tenant’s perspective). 

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by TM Bates & Co. Barristers / Solicitors to anyone who relies on the information contained in this article. All copyright in this article is retained by TM Bates & Co.