Communication is key as landlords and their tenants act to fight the coronavirus spread
Landlords, tenants and managing agents of commercial properties are urged to unite in their fight against the growing threat posed by the coronavirus
Landlords, tenants and managing agents of commercial properties are urged to unite in their fight against the growing threat posed by the coronavirus.
Our commercial property solicitor Tom Gibbons advises those who own, rent or manage commercial premises to ensure that they are familiar with the obligations set out in their leases, and to aim to collaborate and agree suitable measures with other interested parties where possible.
Tom suggests that: “While there's scope for arguments around liability for rent and other payments due under leases, the immediate focus for all parties should be on ensuring that appropriate arrangements are in place in line with medical advice in order to best address the risk of contagion.
“Where possible, communication and co-operation would likely be the best way forward in many cases, at least in terms of practical arrangements. If landlords and tenants can discuss the ever-evolving situation and agree on ways in which necessary action can be taken, then this should help improve outcomes for all interested parties,” he added.
Tom’s advice is:
The starting point: Landlords and tenants should review the terms of their leases in order to ensure they understand their obligations, and the obligations of others.
Responsibility: In terms of responsibility for complying with health and safety and other legal requirements, tenants would normally be expected to bear responsibility for the premises that they actually occupy, but landlords of multi-let buildings or estates may well retain responsibility in relation to common areas and/or shared service media. As such, the parties may have similar obligations in relation to different areas within a building, and co-ordinated measures might improve the outcomes. For instance, landlords arranging for more regular cleaning of higher-risk areas such as shared stairwells or circulation areas within buildings or estates might be coupled with tenants arranging hand sanitiser stations by the entrances to their part of the building or estate.
Regulations: Another area for landlords and managing agents to consider is their ability to make regulations affecting management of a building or estate. Most leases will contain an obligation on tenants to follow such regulations made by the Landlord. Such regulations can go further than legal requirements, and as a result could be more specifically tailored to the needs of a particular building or estate and its tenants; in addition, applying regulations across the building or estate can help ensure that all tenants are doing their bit to meet the wider needs of all users. Landlords and managing agents should consider obtaining advice on their ability to make regulations, the contents of such regulations and the requirements for notifying tenants accordingly. Tenants with concerns around other occupiers might want to approach landlords to try to help draft appropriate regulations.
Financial: A critical concern for landlords and tenants will be whether tenants have to continue paying full rent even if their ability to use the premises in the normal way is adversely affected by coronavirus, either by forced closures, deep cleaning, staff shortages or lack of footfall. This could affect both the investment value of the property for the landlord and the viability of the tenant’s operations. Whilst most leases will state that the tenant is not to make any deductions or withhold any sums from the rent, there is usually a provision for payment of the rent to be suspended in the event of damage to the property by an insured risk. Detailed consideration may be required as to whether (or to what extent) the rent suspension will apply, particularly given that issues surrounding coronavirus may not mean that there is physical damage to the fabric of a building in the same way as would be expected with other insured risks such as fire or flooding. Landlords should ensure they understand the terms of their buildings’ insurance cover in this respect, while tenants should likewise be checking their business interruption cover.
Turnover rent arrangements: For leases featuring turnover rent arrangements, whereby the rent the tenant pays is calculated by reference to the turnover generated from the property, tenants might expect the rent to go down if takings suffer. However, there could be complications if the premises are closed for trade altogether, as many leases state that where premises are closed the rent continues to accrue for the closure days based on average takings for days on which the premises were open during the relevant period. Again, detailed consideration may be needed in terms of how the specific wording of turnover rent provisions will apply if premises are closed on the instructions of the authorities on public health grounds.
Service charges: Another key financial consideration will be the parties’ obligations in relation to the service charge. Service charge provisions normally allow landlords to recover contributions from tenants towards the costs incurred in managing common areas or providing shared services. However, both parties will need to consider whether the cost of a specific measure is in fact covered by the wording of the lease.
Even if the provision of a particular service by the landlord is not specifically mentioned in the lease, landlords will usually insist that they have some flexibility around providing additional services; often the test will be whether additional items fall within the principle of good estate management, which leaves some room for argument about what is chargeable if the parties have not already agreed an approach.
On the other hand, Tenants may have negotiated specific exclusions from the scope of the service charge, or a cap on their total liability for services, which could leave landlords obliged to provide certain additional services but unable to recover the cost of doing so.
Tom concluded: “The application of standard lease clauses in these novel scenarios has not been tested in the courts and therefore there is not a body of case-law to offer guidance to the parties. If landlords and tenants can agree their approaches to the practical issues then that should be a priority for the time being, although clearly the financial implications will also grow in importance as time passes, which could add to the potential for disputes around un-tested points of law,” added Tom.