A Tenant’s Position
If as tenant, you can no longer afford your rent and/or use your premises, what are your options?
Force Majeure / Frustration
The concept of force majeure (which is rarely, if ever, included in leases) and the doctrine of frustration (which has never been successfully used to end a lease) are unlikely to enable you to either end your lease early or to withhold rent on the basis that you are “unable to occupy for reasons beyond your control”. It is always worth checking the exact terms of your lease however, in case relevant exceptions apply.
Force majeure: “force majeure” clauses operate so as to release contractual parties from liability if certain circumstances arise that are beyond the control of those parties and prevent one or more of them from complying with the obligations contained within the contract.
Frustration: where a significant change of circumstances makes the performance of a lease radically different from what was originally envisaged, it can potentially be argued that the lease has been “frustrated”. This would mean that the parties no longer have to perform their obligations under the lease. However, the “frustration” test can be difficult to satisfy, as performance must be radically different, not simply more difficult or expensive.
Landlord’s breach of covenant
If your landlord has been forced to close your building by law, does this mean you can withhold rent or terminate your lease? Under such circumstances, the landlord would arguably be in breach of their obligation to afford you the “quiet enjoyment” of your property and not to derogate from the grant of exclusive possession. However, unfortunately your lease is very unlikely to allow you to legitimately withhold rent under any circumstances and the landlord will likely have a strong defence against breach of covenant.
Insurance is unlikely to be helpful either, as it is not common practice for either landlords’ building insurance or tenants’ business interruption insurance to cover epidemics/pandemics. Again, it is worth checking however, as certain insurance products do explicitly cover these risks.
What should tenants do (and avoid doing) in the meantime?
“Keep Open” covenants
Identify whether your lease contains a “Keep Open” covenant and if so, consider whether you might, on the face of it, be in breach. If you have been legally required or advised to cease business operations, it is unlikely that your landlord will be able to enforce a “keep open” covenant or claim damages in connection with the breach of such covenant. It is however always worth forewarning your landlord of any closure.
“Keep open” covenant: this is a provision sometimes included in commercial leases that requires tenants to trade continuously throughout the duration of the lease.
Vacant premises insurance requirements
Consider whether your landlord’s buildings insurance policy (or your insurance policy if you are responsible for insuring the property) sets out any requirements that must be met if the property is left vacant for an extended period of time (e.g. a requirement to inspect the premises or ensure security is in place). If the landlord’s insurance policy does set out requirements and you are in breach of these – inadvertently or knowingly – this might serve to void the insurance.
Leases often contain clauses stating that if any insurance is voided as a result of an act or omission of the tenant and the landlord suffers a loss as a result, that tenant is required to make good that loss to the landlord.
Invoking break clauses
If you are lucky enough to have a break option coming up in your lease, make sure you understand when and how you must notify the landlord that you wish to break the lease, otherwise you risk missing the relevant deadlines. Break clauses are strictly interpreted by courts, so make sure you carefully comply with any requirements/processes in order to avoid invalidating your break. To that end, we strongly recommend seeking legal advice on all break notices.
If you cannot break your lease, consider whether you can instead assign or underlet it. There will inevitably be companies out there that are succeeding financially (or even expanding) as a result of increased COVID-19-related demand, so you may well be able to find a company willing to take on your lease. There may also be certain circumstances in which a landlord might accept a surrender of the lease.
Does the Coronavirus Act 2020 suspension of a landlord’s right to forfeit help?
This legislation was enacted to protect business tenants from being evicted on the basis that they are unable to pay their rent (such circumstances would usually entitle landlords to evict commercial tenants on the basis that the lease has been “forfeited”). This protection has currently been put in place until 30 June 2020, but may be subject to further extension.
However, tenants must beware that:
- This is not a waiver of the obligation to pay rent in respect of this period. Tenants remain liable to pay their rent and related expenses under their leases (including service charges and insurance) and at the end of the period of protection, any unpaid rents will become due, along with any interest that has accumulated.
- This does not preclude a landlord from seeking to collect the rent via other lawful means, for example via the Commercial Rent Arrears Recovery scheme. It is therefore worth trying to maintain a positive relationship and transparent dialogue with your landlord and reaching a genuine compromise where possible.
- The Landlord is still entitled to drawdown on other security (if any is in place, for example rent deposits) and tenants will ordinarily be contractually obliged to top up the deposit or risk forfeiture.
- Landlord’s can still rely on guarantees provided by third parties (either as guarantors in the lease or under Authorised Guarantee Agreements) if tenants are unable to meet their lease obligations. Depending on the terms of a guarantee, guarantors can be required to comply with the tenant’s covenants in the lease and even to enter into a new lease with the landlord if the tenant becomes insolvent.
- This protection does not apply to leases of less than 6 months or to licences of any duration.
Negotiating other concessions
Crucially, this period of protection from eviction afforded by the Coronavirus Act 2020 gives tenants time to negotiate rent concessions with their landlords, without risking forfeiture.
Remember that it is not, by and large, in a landlord’s interest for its tenants to go insolvent or to forfeit the lease; under such circumstances, the landlord may subsequently find that they cannot re-let the property and will therefore be responsible for all obligations relating to the property and its upkeep.
Concessions can include:
- Changing from quarterly to monthly rental payments, to help manage cash flow.
- Agreeing a period during which rental payments will be suspended (and then repaid at a later date).
- Agreeing a period during which rent will not be charged (“rent-free”).
- Reductions in rental rates.
- Agreeing that the landlord can deduct funds from the rent deposit if they waive the tenant’s obligation to top it back up (in the short-term).
There may be other ways of reducing financial commitments under your lease. For example, you could open a dialogue with the landlord and other tenants in the building and try to collectively agree a reduction in the provision of communal services (in order to decrease service charges).
Beware of agreeing to more onerous conditions (e.g. an extension of the rental term) in exchange for your landlord agreeing to offer rent concessions, especially if you are not certain that you will be able to meet/comply with such conditions.
Crucially, make sure that whatever you agree verbally is then documented in writing and signed by everyone involved (otherwise you might find it hard to defend a future claim for breach of the lease). Often this can be achieved with a straightforward side letter.
How Can Ignition Law Help?
Our property team acts for a wide range of clients, including landlords, tenants, buyers and sellers. We can handle the full spectrum of property matters, from the usual to the very unusual
- Advising on and negotiating documentation for new leases, licenses and other property-related rights;
- Advising on and carrying out property due diligence when purchasing/selling companies that own or lease properties;
- Advising on all purchases and dispositions of property;
- Advising on all contentious property matters, including service charge disputes and dilapidations claims;
- Insolvency and forfeiture-related issues; and
- Advising on environmental, planning and construction matters.
Ignition Law provides a unique, seamlessly integrated legal services offering that has helped thousands of entrepreneurial and ambitious start-ups, scale-ups, VC-backed SMEs and other high-growth enterprises secure investment, meet their governance obligations and rapidly scale.
In the first instance, please don’t hesitate to contact:
- Cath Campbell- Barnard: email@example.com
- Helen Lucas: firstname.lastname@example.org
- Lauren O’Sullivan: lauren.o’email@example.com
- IgnitionLaw’s office: +44(0)2034324020
This short guide has been prepared for directors and owners of private limited companies for information purposes only, in particular to provide a summary of the options available for tenants that are experiencing financial difficulties. This guide does not constitute legal advice and should not be relied upon. For specific queries and any further information, please contact Ignition Law for advice relating to your particular circumstances.
Cash flow and funding considerations in light of government guidance as of 1 October 2020