Covid-19: Clauses in commercial leasesJuly 08, 2020
The word ‘unprecedented’ has been used a lot to describe the Covid-19 outbreak. But as lockdown measures are eased, precedents -including those for commercial leases - are being updated.
As landlords and tenants now discuss how to strike a fair balance, new clauses are being prepared to reflect the new reality. This includes Covid-19 clauses in new or varied commercial leases. Such clauses seek to set out the parties position if government restrictions are imposed to control the spread of a disease.
Below are our top tips to consider before making changes to your commercial leases:
Does the tenant pay?
Consider what will happen if the tenant cannot use the demised property under the lease because of future Covid-19 restrictions. The default position in commercial leases is that the tenant has to pay the rent, regardless of whether it can use the let space. This is the case even where the tenant is prevented from using the space because the government has imposed restrictions to prevent or delay the spread of a disease such as Covid-19.
Should the rent be suspended?
If agreed, there can be new express wording to make clear the rent is ‘suspended’ and not due by the tenant. This means the landlord would absorb and write off the rent but provision could also be made that a certain amount is deferred, to share the risk. The default position has been that commercial leases do not have something like a ‘force majeure’ provisions that deal with pandemics. The rent is normally only suspended if the property cannot be used due to physical damage caused by an insured risk.
What is a lockdown event?
The parties should consider how to define and spell out what will count to trigger any rent suspension. Will it be if the government imposes full mandatory lockdown measures but not if there is a more relaxed set of restrictions? The wording will need to define ‘use prevention measures’ or something like and set out what will count.
Can it be a fair proportion of rent?
One of the reasons to be clear as to the extent of the lockdown is that a tenant might only have to close part of the property. For instance, some premises have outdoor areas which can potentially operate safely. Would the rent then be suspended in part? Lease wording can provide that the rent is reduced by a ‘fair proportion’ but it needs to be clear how this will be assessed in case of disagreement.
Will access be needed to part of a building?
If the tenant could trade but the common parts are locked down, will that count for suspension? This could arise if a landlord needs to restrict access to shared areas, for instance, if the let space is within a landlord's building, estate or shopping centre. Will not being able to access count for a rent suspension?
How much future proofing is enough?
Some of the draft clauses have suggested optional wording for the provisions to apply in relation to other epidemic or pandemic diseases in addition to COVID-19. How much future proofing is enough and what future events should potentially by included?
Is there an end date?
What is the maximum number of days that the rent would be suspended from? It is best to have a certain time period for this to draw the line. In the event any restrictions are not lifted in a certain period, who can give notice to then end the lease? In some cases, tenants may also ask for a break clause to exit leases at their option. A landlord is likely to prefer deferred arrangements or concessions letters. This will depend on the property, leases length and the bargaining strength of the parties.
The benefit of written commercial leases is clarity, and anyone considering how to improve clarity about future lockdown measures will need to carefully consider any specific factors relevant to their particular transaction.