COVID-19: Retail landlords and tenants on lease terms
23 March 2020
The ongoing global COVID-19 pandemic has caused understandable concern and ambiguity for landlords and tenants regarding their respective positions. The situation is a constantly changing one and although there are currently no formal directions from the Irish Government forcing closure of retail outlets this could of course change at any time.
In the event of the closure of a retail premises as a result of the pandemic, parties will be concerned as to options open for the suspension of rent or even the termination of the lease itself.
Each case will of course turn on its own facts and a full review of the lease and any related side agreements underpinning the agreement between the landlord and the tenant in relation to each specific question should be carried out to establish the rights and obligations of each party. However, the following is some general advice on what a “standard” position would be and the rights and options potentially open to the parties.
As a general rule in any contract between two parties, the concept of force majeure exists; however, it is not standard practice for a lease to have a force majeure clause and therefore it is unlikely that a tenant could avail of this outlet.
A potential option open to a tenant would be under the doctrine of frustration, particularly in the event of specific Government order for closure of retail premises, on the basis that there has been the occurrence of a supervening event, which the parties have not provided for in the lease, resulting 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, however, is to terminate a lease in its entirety, which may not be the outcome sought by either party.
A tenant may claim a rent suspension because it is unable to operate from the premises normally. Such a claim is unlikely to succeed as lease provisions for rent suspension are generally linked to physical damage or destruction to the premises or the means of access and egress to it. Although a tenant’s ability to operate its business may be significantly disrupted by the pandemic the premises remains physically available and intact but it cannot be used due to closure. Accordingly, there is no specific or general right for tenants to withhold rent during this period. The provisions of services we would expect to be treated differently where the services are no longer being provided.
Separately, however, where the lease contains turnover rent provisions eliminating the obligation to pay full market rent, there could be an argument that the turnover provisions are suspended for the period of the pandemic as the concept of turnover no longer exists.
Where the premises forms part of a development like a shopping centre or office block and relies on access from common parts which have been closed by the landlord directly rather than on foot of specific Government order, consideration may be given to whether this would constitute a derogation from grant and/or breach of the quiet enjoyment covenant in the lease opening the way for a tenant claim for loss of income. Consideration would need to be given to any “keep open” covenant in the lease and the separate covenants for compliance with statutory orders and directives
Finally, parties should consider whether the landlord or tenant insurance policies allow for recovery of any loss of rent/business interruption losses, notwithstanding that there may be no physical damage to the premises. You should contact your insurance broker in this regard.
In short, the options open to either side are not clear and the position will no doubt change as it evolves over the next few weeks or months. All communication with your opposite number is paramount during this period and temporary commercial arrangements may be the best course of action to attempt to keep the status quo going.