Coronavirus - Some FAQs from a real estate perspective

As the spread of coronavirus continues in the UK and throughout the world, we have been fielding questions from our real estate clients, many of whom are anxious to know how the day to day impact of the virus will affect their property interests. While no one can be sure how matters will develop in the coming weeks and months, we have provided our take on the key issues being discussed below.

Can a tenant terminate a commercial lease because of the impact of coronavirus?

Frustration

Given that the benefit of a lease to a business may be substantially diminished because of disruption caused by coronavirus, we have considered whether leases may be terminated under the doctrine of "frustration". In other words, if we assume that disruption of this nature was not contemplated by the parties prior to completion of the lease and further performance of the lease is rendered impossible, perhaps owing to a state imposed closure of a given site, is the impact significant enough to set the lease aside?

For context, it should be noted that although frustration of a lease is legally possible, there has never been a reported case of it in England & Wales. This is largely because land demised by a lease will nearly always be capable of enjoyment in some form, even if this becomes very difficult or impossible for a period of time. For example, in the leading case, a 20 month closure caused by a Local Authority was not sufficient to frustrate a 10 year lease. We would all hope that any closures for coronavirus do not last that long, so in our view, termination on this basis is unlikely.

Force majeure

Force majeure clauses vary or alleviate a party's obligations in a contract, usually following a catastrophe or "Act of God" outside of either party's control. While they are commonly included in commercial contracts, they are far less common in leases. Even if the impact of coronavirus fell within the definition of a force majeure event in a lease, it would be rare to see drafting that would permit this to be used as a reason to terminate the lease.

Will tenants need to pay rent for any periods of time that they cannot use their premises?

The answer to this question is likely to depend on the terms of any "rent cesser" provisions in the lease. In some leases, closure of a given premises owing to the outbreak of a virus may be an "Insured Risk", which triggers a rent free period. The landlord would then recover its lost rent under its policy of insurance. However, this is unlikely to be the case, since landlord's insurance is chiefly designed to cover damage to the fabric of the property itself. The likely conclusion is therefore that tenants will need to continue paying rent in most circumstances.

Similarly, if the rent is a turnover rent and turnover declines because of the virus, it is unlikely that the landlord will be compensated for the decrease in rent, unless a specific policy of insurance for loss of rent applies.

Could coronavirus concerns lead to specific breaches of a lease by landlords or tenants?

Most leases will contain a tenant's covenant obliging the tenant to comply with all public laws. This type of clause could prevent tenants using their properties in certain ways if the Government directs that such use would be unlawful. This may be particularly relevant if the tenant commonly organises large gatherings of people.

Depending on the nature of the use of the premises, leases may also contain provisions obliging the tenant not to undertake any activity that could endanger the safety of individuals within the demise or in common parts. Again, if the nature of the tenant's use of the property is likely to increase the chance of spreading the virus, then this use may need to change, perhaps for extended periods of time.

Equally, in circumstances where one tenant is in breach of a covenant of this nature, it may be the case that other tenants can oblige the landlord to enforce the covenant, failing which it could face a claim itself. This may be a particular issue in a mixed use scheme.

What recourse does a tenant have if it can't use its property gainfully and can't terminate its lease?

As noted above, we anticipate that landlord's insurance policies are unlikely to cover losses suffered by tenants owing to coronavirus. Tenants should therefore liaise with their insurance brokers to review any policies they hold covering business interruption, to see if they would cover rent paid in these circumstances (as well as other losses).

Should vulnerability to coronavirus vary the approach taken by landlords and tenants?

In our view, the common sense answer to this question is yes. For example, the current advice is that older people are more likely to be at risk, so organising mass participation events in areas where older people live would be more likely to constitute a breach of a lease obligation not to endanger public health. As the spread of the virus progresses, the Government may either legislate or issue advice that provides further guidance. This will no doubt help to inform the interpretation of relevant lease obligations.

We will all be watching how the spread of coronavirus progresses and we will endeavour to provide further updates if the legal landscape changes as a result of Government intervention.