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Rent and Outgoings under Commercial Leases during Lockdown

31 March 2020

Landlords and tenants are equally concerned about the payment of rent and outgoings under commercial leases while the country is in lockdown. Many tenants’ businesses are not essential services and they are, therefore, unable to continue trading or running their business from leased premises.

While we expect some official guidance will be made available to commercial landlords and tenants as the Government’s response to COVID-19 continues to develop, answers to two common questions are set out below. These answers are based on the current position, any may change.

Please contact us for detailed advice on your specific circumstances.

Must rent and outgoings be paid during the lockdown?

If your lease is the ADLS 6th Edition Deed of Lease, and it is no longer possible for you to fully conduct your business from the leased premises because of the lockdown, you are likely to be entitled to some relief.

Clause 27.5 of the ADLS 6th Edition Deed of Lease applies where there is an emergency and the tenant is unable to access its premises to fully conduct its business because access is not permitted for safety of the public or property or because of the need to prevent, reduce, or overcome any hazard, harm, or loss associated with the emergency. An emergency includes an epidemic that may because loss of life or illness not caused by an act or omission of the landlord or tenant. We consider that COVID-19 and the associated restrictions imposed by the Government in response to COVID-19 qualifies as an emergency.

Where clause 27.5 applies, a “fair proportion” of the rent and outgoings will cease to be payable to the landlord for the duration of the period that the tenant cannot access the premises to fully conduct its business.  In many situations, there will remain use of the premises for storage of goods and equipment, and the tenant still has quiet enjoyment.  A landlord will have its own costs and is unlikely to have access to insurance cover for loss of rent, which ordinarily excludes pandemics.  What a fair proportion of the rent and outgoings will be must be assessed and agreed on a case by case basis.

If your lease is not the ADLS 6th Edition Deed of Lease (which was introduced in 2012), it may not have an equivalent clause to clause 27.5 of the ADLS 6th Edition Deed of Lease. Other bespoke forms of commercial lease may also not have an equivalent clause or may have different emergency provisions.

If many of those situations, rent and outgoings will in remain payable unless a reasonable rent abatement or deferral or rent is agreed between landlord and tenant. We encourage landlords and tenants to work together towards finding a mutually agreeable and practical interim solution.

Is the lease frustrated or able to be terminated because of force majeure?

A commercial lease is unlikely to be able to be terminated because of frustration during the lockdown.

While COVID-19 is an unforeseen event, it is does not make the performance of the lease impossible. And, the change in how the lease may be performed (restricted access or no access to the premises) is only temporary. To meet the legal test of frustration, the change in circumstances would need to be more than temporary.

Force majeure clauses may provide for termination rights in some cases. These clauses must, however, be considered on a case by case basis to determine whether the specific circumstances give rise to a right to terminate.

Our team of expert property lawyers are working with other professionals and industry bodies to develop pragmatic solutions for lessors and lessees in these circumstances.