COMMERCIAL LEASES IN THE AGE OF LOCKDOWN – LANDLORD AND TENANT ISSUES

Currently there is no direct Government assistance for Landlords or Tenants affected by the lockdown, apart from wage subsidies and banking support (including Government backed guarantees).

Some leases contain what is known as a “no access in an emergency” clause.  This clause provides that if:

• there is an emergency; and
• the tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or related to the emergency;

the tenant may claim an abatement of a “fair proportion” of the rent and outgoings for as long as the tenant cannot access the premises due to the emergency.

There has been a fair amount of discussion about whether tenants can now make a claim under this clause.

Our view is yes, they can.  Since the Government COVID-19 response escalated to Level 4 from 25^th March 2020, with all non-essential business directed to close their places of work, most tenants should be able to claim a rent and outgoings abatement if:

• they are on a form of lease that contains this clause (which is found in an unamended ADLS lease form since 2012 at clause 27.5); and
• they do not operate an essential service from the premises.

The ability to abate rent and outgoings (for non-essential business) could provide some significant relief to those businesses.

Clause 27 and You

Typically, the optimal situation is for a Landlord and Tenant to negotiate early on.  But there are also fallacious interpretations of clause 27 circulating, based on an incorrect reading of clause 27.  The message that Tenants can simply avoid paying rent arises from a misinterpretation; it is also unreasonable as Landlords have fixed costs that must be met.  Fairness is a two way street.

The specific fine print in clause 27.5 states “a fair proportion of the rent and outgoings shall cease to be payable”.  As with most contractual disputes, the outcome depends on a few key words, adopting a plain reading and having regard to context.  The obvious issue is the meaning of “fair proportion”.

What is Fair?

“Fairness” is unlikely to mean zero. The same ADLS lease includes an arbitration clause.  So if negotiations have failed and if this clause hasn’t been removed then the parties have agreed to refer all disputes to an arbitrator and not the Court.  It could then be open for a Tenant to argue that in contractually providing for an arbitrator, the parties have implicitly included the following wording into clause 27:

“The parties agree that if they cannot agree on what constitutes a fair proportion of rent and outgoings for this clause then they shall appoint an arbitrator who shall determine what a fair proportion is, acting reasonably.”

So, what is a fair proportion in this context?  We would argue that this would be produced by a suitable valuer adopting the overriding economic arguments relating to the business and its use of the premises.  In essence, an economic analysis of the nexus between the use – or loss of tenant’s use – and the tenant’s business.

Different Tenants Are affected Differently

The economic impact of COVID-19 has been uneven across industries.  For example, if the tenant was a restaurant, then you would expect the use and business would be completely linked.  Many such businesses have ended with the lockdown, so it would be fair for the tenant to have a substantial rent reduction – even as high as 100%.  However, it may require an assessment of the business once all of the available subsidies and government supported banking facilities have been quantified.

However, if the tenant was a professional services firm, that had all its staff working remotely and the premises had little or no nexus with their business then the fair proportion could be nil.  Any loss in business could be attributed to normal business factors outside of the premises, which do not necessarily fall under the Landlord’s purview.

Where Do My Rights Stand as a Landlord?

Ultimately, without amendment, the ADLS lease does not allow the Tenant to unilaterally stop paying the entirety or part of the rent.  It can only do this by agreement, with a Court Order; or as determined by an arbitration.  Working through such situations in these times is at the Landlord’s discretion, and any agreement with Tenants should be recorded in writing – deeds are preferable but may not be practical under the current climate.

For consultation around your individual circumstances, don’t hesitate to contact us.