In these difficult times many businesses are struggling or already failing and rental income streams are under pressure as never before. In this article we consider to what extent the recently introduced emergency legislation might impact on tenant liability for rent, and landlord remedies for non-payment.
Before his current confinement the Primleased premisese Minister announced, on 23 March, the introduction of The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (“the Regulations”) which were enacted, and came into force, at 1pm on 26 March. Compliance with the Regulations is a criminal matter because any person who contravenes them, without reasonable excuse, will be committing a criminal offence.
Things have been moving very quickly but as we write the PM is still being treated in intensive care and there is much speculation that the lockdown will extend into May and even beyond. Businesses the length and breadth of the country, and the premises from which they operate, have been forced to close down.
Which tenants are affected?
Schedule 2 of the Regulations sets out the businesses which are subject to restrictions or closure. Part 1 of Schedule 2 lists the food and drink businesses that must close except for the purpose of selling takeaway food. These included restaurants, cafes, bars and pubs, including restaurants and bars in hotels and members clubs. Exceptions to this closure include cafes or canteens in hospitals, care homes or schools and services providing food to the homeless.
Part 2 of Schedule 2 lists the businesses which must close with no exceptions and these include: cinemas; theatres; nightclubs; bingo halls; concert halls; museums and galleries; casinos; betting shops; spas; nail, beauty, hair salons and barbers; massage parlours; tattoo and piercing parlours; skating rinks; indoor fitness studios, gyms, swimming pools, bowling alleys, amusement arcades or soft play areas or other indoor leisure centres or facilities; funfairs (whether outdoors or indoors); playgrounds, sports courts and outdoor gyms; outdoor markets (except for stalls selling food); car showrooms; and auction houses. Additionally, Regulation 5 (3) provides that, subject to certain exceptions, a person responsible for carrying on a business consisting of the provision of holiday accommodation, whether in a hotel, hostel, bed and breakfast accommodation, holiday apartment, home, cottage or bungalow, campsite, caravan park or boarding house, must cease to carry on that business during the emergency period.
Part 3 of Schedule 2 lists the businesses which are permitted to remain open subject to restrictions. These include food retailers, food markets, supermarkets, convenience stores, corner shops, off licenses, pharmacies/chemists, newsagents, petrol station, building supplies and hardware stores and more.
There are also many other businesses which are not listed but which are effectively closed, or, arguably, cannot operate from their leased premises, because of the restrictions on movement imposed by Regulation 6 which provides that “no person may leave the place where they are living without reasonable excuse”. All over the country offices and other business premises have effectively been shut down because staff have to stay at home.
How long will the Regulations last?
It is not known how long the lockdown will last. The “emergency period” as it is called started when the Regulations came into force on 26 March. It will continue until further notice although the Secretary of State must review the restrictions every 21 days, the first review to be carried out on 16 April. The speculation is that it will last into May and even beyond.
What about rent and forfeiture?
Rent is often one of the biggest outgoings for a business and usually paid quarterly. As many business tenants have seen their income fall dramatically, or reduced to nothing, they are inevitably looking at their rental liability and asking themselves if rent still has to be paid. Indeed, there will be many tenants who have not paid their March quarter’s rent which was due a few weeks ago, or have paid for a month instead.
Neither the Regulations nor the Coronavirus Act 2020 (“the Act”) provide for any sort of rent holiday or payment deferment for business tenants. The Act does however, until 30 June 2020 (unless extended), prevent: (i) landlords from forfeiting the lease for non-payment of rent and other sums; and (ii) prevent the court from making orders for possession.
Many readers will be familiar with the concept of ‘force majeure’ for which there is often a clause included in contracts to remove liability in the event of an unforeseen catastrophe. You do not see such clauses in commercial leases (at least the writer has never seen one). Invariably there are provisions around insurance and how rent and other matters will be dealt with if there has been an insured event, and cover applies. It seems unlikely that there will be many property insurance policies which cover tenants who are unable to occupy their premises because of a viral pandemic and consequential government lockdown.
There is, however, in English law, a legal doctrine called ‘frustration’. This can operate to set aside contracts (including leases and lease covenants) where, without fault of either party, an unforeseen event renders a contractual obligation incapable of performance or radically changes the outstanding contractual rights from what the parties could reasonably have contemplated. A possible basis for frustration in the current lockdown would be what is termed ‘supervening illegality’.
The forced, or effectively forced, closure of business premises because of the lockdown restrictions in the Regulations may, arguably, amount to ‘supervening illegality’ and, in theory, could cause leases to be frustrated.
If there is frustration what is its effect? Ordinarily it would operate to discharge or terminate the contract or lease but might it operate to suspend performance instead? There is some authority for suspension where the supervening event is judged to be temporary. Remaining contract or lease length would likely be a factor.
There is little case law on the operation of frustration in the context of leases. It is a particularly complex and nuanced area of law, and is only likely to apply in exceptional cases.
If you have any questions about this article and the matters discussed, or need advice on any situation, please contact us.
Guy Bate is Head of Dispute Resolution.
9 April 2020
This Legal Update is published as a general guide only and it is not intended to contain definitive legal or professional advice, which should be obtained as appropriate in relation to any particular matter. This publication relates to matters prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.