Unless you have managed to avoid the news, newspapers, social media, family, friends and colleagues, for the past 3 months you will be well aware of the worldwide spread of COVID-19. As individuals we are now being vigilant in taking extra hygiene precautions to help stop the spread of the disease. However, what issues should you be aware of if you are a Landlord of a large multi let building?
This article will briefly highlight some issues that a Landlord of a multi-let commercial building (such as an office block or shopping centre) should be aware of in light of the current situation regarding COVID-19. As property lawyers however we can’t advise how you can obtain extra orders of hand sanitiser and toilet paper but clearly managing your supply chain in the provision of services to the building could also involve extra considerations.
Background – So what happened?
On 31 December 2019 the World Health Organization was informed of a cluster of cases or pneumonia of unknown cause in Wuhan City, China. On 12 January 2020 it was announced that coronavirus is the suggested cause of the outbreak. The virus is referred to as SARS-CoV-2 and the disease as COVID-19 (Coronavirus Disease 2019). As we can see from the media reports, the outbreak has since spread worldwide and many businesses have taken, or are starting to take, steps to protect their employees, customers and the public.
TOP TIP: LOOK CAREFULLY AT THE WORDING OF YOUR LEASE(S) AND INSURANCE POLICIES
If a government authority closes your building, or you are considering closing the building due to health and safety concerns of your staff, the tenants or the public, you should take a careful look at the wording of your lease(s) and insurance policies as a landlord’s decision to close the building alone may be considered ‘derogation’ from the grant of the lease.
The lease will contain rights and obligations in the lease to cover many eventualities but a pandemic is mostly uncharted waters. The key common lease provisions for Landlords to consider are
- Force Majeure clauses
- Rent Suspension
- Frustration
- Insurance
- Services and Service Charges
Force Majeure
If the lease(s) is an older form of lease you may find that there is a ‘Force Majeure’ clause detailed within the lease. Force majeure occurs where there are unforeseeable circumstances that prevent someone from fulfilling a contract. A force majeure clause is rarely seen in modern forms of lease. This clause is intended to suspend or end performance of a party’s obligations under the lease where that party is prevented from performing these obligations by an event outside of its control.
Strictly speaking, the spread of COVID-19 is not an ‘event’ therefore it may be difficult to establish that this pandemic falls within the remit of the force majeure clause, however, it is important to carefully check the exact wording of the clause. If a government authority were to force closure of the building, it may be possible to establish that this is a force majeure event and your obligations as a Landlord can be suspended, however this would also mean the Tenant’s obligations would be suspended (such as paying rent).
Rent Suspension
The suspension of rent payments is normally covered as a provision in a commercial lease if the building is destroyed or damaged by an insured risk and sometimes an uninsured risk. It is advisable to check the definition of ‘Insured Risk’ and ‘Uninsured Risk’ within the lease(s) to see if a disease pandemic or closure of the building by a government authority could be caught within that definition. Standard insurance clauses in commercial leases may not cover this as ordinary buildings insurance policies normally cover the event that the building, or access to it, has been made physically inaccessible, destroyed or damaged.
Frustration
A lease may be set aside by frustration where an unforeseen event occurs after the lease was made which is neither party’s fault but which results in either the lease being impossible to perform or it substantially changes a party’s purpose for entering into the lease. If the lease is frustrated each party is then discharged from the obligations within the lease and neither can bring a claim against the other.
Last year we saw in the case of Canary Wharf v European Medicines Agency that the High Court ruled the 25 year commercial lease was not capable of being frustrated by Brexit and the European Medicines Agency was to continue to be bound by the lease terms. It will therefore be in very rare circumstances indeed that the court will deem a lease to be frustrated and unlikely that the outbreak of COVID-19 and a government authority’s decision to close the building would be sufficient grounds to frustrate the lease.
Insurance
The usual position on buildings insurance is that most building policies only cover risk for physical damage or destruction to the insured building as a result of a risk covered by the policy (such as fire, an explosion, impact by a car). However, sometimes, cover may include losses caused by a notifiable infectious disease, but often with an exclusion for diseases such as avian flu, SARS and foot and mouth disease, based on insurers’ previous experience of those outbreaks.
Whilst the COVID-19 outbreak would unlikely be covered in a standard buildings insurance policy, it is recommended that you check the wording of your policies just in case it covers income loss associated with notifiable diseases, or the eventuality that there is limited access to the building due to circumstances outside of your control, or a government authority closing the building.
Business interruption insurance policies (generally more likely to be taken out by the occupying businesses) sometimes also offer cover where the trigger is loss of use of the property due to the action of civil authorities. Debate arises as to who or what constitutes a civil authority, and what action by them causes loss of use - cover sometimes includes losses caused by a notifiable infectious disease.
Notifiable infectious diseases are listed under the Health Protection (Notification) Regulations 2010. COVID-19 did not become a notifiable infectious disease until 3 March 2020 in England and Wales. Losses caused before these dates would not be covered, even if you have this cover.
Service charges
Cleaning and security of buildings is normally included within the definition of services provided by a Landlord but this should be checked in the body of the lease. There may also be a service charge ‘cap’ in the lease which would mean costs of increased services may not be fully recoverable. Where you need to revise your service charge budgets do check the provisions of the lease carefully to ascertain your entitlement to vary the service charge. It would also be advisable to notify your tenants of the impact of any additional costs on their service charges, particularly where their business may also be impacted by the outbreak. The increased costs of services is also more likely to hit a landlord where the costs of services are included within the rent payments as the provision for rent review will generally not be as flexible as a separate service charge provision.
Rent Arrears and Forbearance
It is also likely that many Landlords will also be concerned about rent arrears accruing from tenants whose businesses have closed. However, in these uncertain times it may be better to monitor the situation and wait to see (known as forbearance in legal terms) what is happening in the market before taking any legal action especially as there are unlikely to be replacement tenants for empty units. Forbearance may be expressly mentioned in the lease but it is important to be wary of potential risks of misunderstandings as to rental holidays and treatment of arrears. If you do strike a compromise with your tenant over rent payments or reductions in rent or other forms of ‘forbearance’ it is usually best to document the terms in a formal memorandum and clearly record the duration of any temporary variation of the terms so that there can be no ambiguity regarding the agreement once the pandemic has passed.
SUMMARY
As a landlord, if you are forced to close your building, decide to change the cleaning and security regimes, or even if your tenants chose to close their businesses, it is important to remind yourself of the relevant clauses within the lease(s) and applicable insurance policies, so any decisions can be taken in a well-informed manner and so that you can take steps to minimise any losses.
The World Health Organisation (www.who.int) and Public Health England (www.gov.uk/government/organisations/public-health-england) are constantly updating their guidance so please keep appraised of the situation in case emergency action is to be taken.
Since writing this article, announcements have been made by the government stating how they will assist UK businesses during this outbreak. In advance of the March rent quarter payment day, it has been announced that an amendment to the Coronavirus Bill will mean that any commercial tenants who are unable to pay rent for the next 3 months, because of the coronavirus outbreak, will be protected from eviction. This is designed to assist landlords and tenants who are likely to already be having conversations to reach a voluntary agreement to further assist those businesses struggling with cash flow. Please note that this only relates to missed rent payments only over the next 3 months and is not for any other breach of the lease or missed rental payments outside of that time frame. For further information, please check the government website.
Background information from: https://www.gov.uk/government/publications/wuhan-novel-coronavirus-background-information/wuhan-novel-coronavirus-epidemiology-virology-and-clinical-features