The ongoing global COVID-19 (coronavirus) outbreak is dominating global headlines, creating concern and ambiguity for many, including landlords and tenants. The impact of the virus is still unknown, and it is unclear whether it will be declared a global pandemic and for how long it will continue. Based on the World Health Organization’s declaration that COVID-19 is a public health emergency of international concern, the UK Chief Medical Officers have raised the risk to the UK from low to moderate. This briefing will consider the implications of shopping centres or large buildings being closed by the government, landlords or tenants and the corresponding impact upon the obligations of both landlords and tenants.
While the briefing focuses on landlords and tenants of shopping centres, the legal principles will have application to commercial leases more generally.
Scenario 1: The government/local council closes a shopping centre because of COVID-19
A force majeure clause usually provides that upon the occurrence of a specified event, the parties can either terminate a contract or possibly suspend/delay performance of their obligations.
Whilst force majeure clauses are now rare in modern commercial leases, some more historic leases may contain force majeure clauses and therefore parties should review their leases carefully.
Whether COVID-19 will be a force majeure event will depend on the specific wording in a force majeure clause. However, as a pandemic is not a specific act/event but rather an evolving state of affairs, it may be difficult to establish that COVID-19 is a force majeure event. We consider a specific government enforced quarantine is more likely to constitute a force majeure event.
If a lease does contain a force majeure clause, it is at least foreseeable that subject to the exact wording, COVID-19 (or an enforced quarantine arising from the outbreak) could amount to a force majeure event which may entitle a tenant to suspend payment of sums due under a lease.
While this will be of concern to landlords, force majeure clauses are now quite rare and the virus will not necessarily automatically qualify as a force majeure event.
Force majeure clauses can also benefit landlords as they may permit landlords to suspend the provision of services under the lease. We have already, today, started to see landlord clients amending provisions in agreements for lease to include an epidemic within the definition of “Force Majeure”.
Many commercial leases, including the Model Commercial Lease for Retail include a rent suspension provision in the event that a centre is destroyed or damaged by an uninsured risk.
Parties should consider the definition of “uninsured risk” (or “uninsured damage”) in the lease to determine whether this could include COVID-19. It is worth noting that in the Model Commercial Leases, disease is unlikely to fall within “uninsured risk”. Possible consequences of the disease such as civil commotion are an insured risk unless for example insurance for that risk is not generally available in the UK market on normal commercial terms, in which case it becomes an uninsured risk.
Even if the closure of the shopping centre due to COVID-19 falls within the definition of an "uninsured risk", the rent suspension will usually only apply in the event that the shopping centre is destroyed or damaged.
In circumstances where the premises have to be closed and deep cleaned, it may be arguable that there has in fact been damage to the property which could potentially cause the rent suspension provisions to bite.
Some leases may be more broadly drafted causing the rent suspension provisions to bite where the premises has become inaccessible notwithstanding that there is no damage to the property.
The doctrine of frustration can apply where a supervening event, which the parties have not provided for in the lease, results in significant changes to the rights/obligations of the parties from what they reasonably expected at the date the lease was completed. The effect of frustration is to terminate a lease.
The Courts have found that while a lease can be frustrated, it will be in very rare circumstances and therefore it appears unlikely that COVID-19 will satisfy the high bar that has been set by the Courts to establish that a lease has been frustrated.
The closure of a shopping centre by the government may constitute an insurance trigger, but it is also standard practice for insurance policies to exclude losses caused by communicable diseases “or the fear thereof”. Again, this will depend on the specific insurance policies landlords and tenants hold. Tenants may also want to consider if any business disruption insurance they hold will allow them to recover losses suffered due to the centre closure.
While property insurance policies may cover loss of profits (e.g. loss of rent), this is often limited to circumstances where the property suffers physical damage. As we mention above, this may be difficult to prove.
Policies may cover the compulsory closure of the property in a ‘notifiable disease’ extension. In England, unlike Scotland and Northern Ireland, coronavirus is not classified as a notifiable disease, although on 4 March 2020 the Department of Health and Social Care England indicated that it will be registering the virus as a notifiable disease.
Both landlords and tenants owe duties of care to their employees and visitors, which it will also be necessary to consider. A shopping centre manager will for example have reception and maintenance staff for whom, unlike office staff, it will be impracticable to work at home. A shopping centre tenant will, similarly, have shop assistants who need to be on station. All such employees will face risks in commuting and in face to face contact with the public. Their employers will have to decide what steps are appropriate or necessary for it to take in the light of continuing news about the outbreak. It will clearly be prudent to keep abreast of Government advice, which is informed by the recommendations of its Chief Medical Officer.
Scenario 2: The Landlord decides, of its own volition, to close a shopping centre because of the spread of COVID-19
Parties will need to carefully consider their leases to ascertain whether there is either a force majeure clause, or a rent suspension clause which will bite in these circumstances.
In a scenario where a landlord elects to shut down a shopping centre of its own volition, tenants may be able to claim against the landlords for derogation from grant and/or breach of quiet enjoyment which could include a claim for loss of income.
Scenario 3: The Tenant decides, of its own volition, to shut its premises due to the spread of COVID-19
Save for any express wording in the leases permitting tenants to close their stores and suspend rent in the event of an outbreak of COVID-19, it will be an uphill struggle for a tenant to establish that it is entitled to withhold rent where it has elected to close the store.
Modern leases sometimes include "keep-open" clauses, especially in respect of anchor tenants. Closing a store may result in the tenants breaching their "keep-open" covenant unless there is a carve out to cover the COVID-19 outbreak.
Only in very exceptional circumstances will English Courts order specific performance of "keep-open" covenants and therefore, if a tenant elects to close a store of its own volition, the landlord is unlikely to obtain a Court order forcing them to re-open, but may have a damages claim. Closure of stores may also impact upon any turnover-rent provisions contained in the leases.
Whether the tenant can suspend payment of sums due under a lease will depend on the specific wording in the lease, particularly in relation to force majeure and any rent suspension clauses.
Landlords and tenants will need to review their insurance policies to ascertain whether loss of rents/business interruption losses will be recoverable notwithstanding that it may be difficult to evidence physical damage to the property.
Landlords may also need to consider their obligation to provide services under the lease and whether in circumstances where they are unable to provide the required services, they may be in breach of their covenants which would leave them open to a claim for damages from their tenants.
In all three scenarios it is worth bearing in mind that the landlord and tenant may have rights to break the lease which they may choose to exercise because of the situation, particularly if closure is for an extended period.