The situation is quickly developing and, at the moment, no one can be sure how matters will develop in the coming weeks and months.
This guidance note is intended to cover some issues that may arise for landlords and tenants of commercial premises and provide some practical advice. Please note that this does not constitute legal advice and individual circumstances will differ. If you require more specific advice please get in touch with your usual MacRoberts contact.
Can a tenant terminate a commercial lease because of the impact of coronavirus?
At common law, a contract may end immediately if the purpose of the contract is frustrated. This happens if the subjects are, without the fault of either party, completely destroyed or damaged to the extent that they are unfit for use or occupancy. However, most commercial leases contract out of the common law rule of frustration (known in Scotland as rei interitus). In the context of COVID-19, it is probably unlikely that a tenant could successfully argue that its lease has been frustrated, particularly if any period during which it is unable to occupy the premises is only temporary in the overall duration of the lease. It may apply to short term leases and licences.
Will tenants need to pay rent for any periods of time that they cannot use their premises?
In standard commercial leases, a rent suspension is only available if the leased premises are damaged and thus unfit for use by reason of an “Insured Risk”. These are the usual risks under a building insurance policy e.g. fire, storm, flood, bursting of pipes. It is therefore highly unlikely that closure of premises due to the outbreak of a virus may be an “Insured Risk”.
A tenant may carry business interruption insurance. In Scotland, the Government has already classified coronavirus a “notifiable disease”, which is a formal classification required by most insurance providers before loss of business cover may apply. However, often the terms of the policy require that someone on the premises has contracted a notifiable disease or the property is damaged by reason of the disease and a public authority has ordered closure of the premises by reason of it. Anyone with business interruption cover must carefully review the exact terms and conditions of their policy.
While a tenant may not be entitled to withhold payment of rent, we recommend they discuss the current unprecedented situation with their landlords. One option to ease cash flow difficulties may be to agree monthly rather than quarterly payments or a rent “holiday” until business picks up again.
Could coronavirus concerns lead to specific breaches of a lease by landlord or tenants?
Most leases will contain a tenant’s obligations to comply with all public laws. In most cases, it will be for the tenant to consider any threat to the health and safety of its employees. Landlords who are employers will also have duties to their staff and others regarding risks posed from infectious diseases. Any failure to comply with these requirements can have serious consequences, for organisations and individuals.
Landlords may also have responsibilities to the extent that they exercise relevant control over parts of premises. In terms of specific health and safety regulations, a landlord has no explicit obligations at law regarding the prevention or containment of COVID-19 in its premises. The virus is, however, a biological agent, so the Control of Substances Hazardous to Health Regulations 2002 (COSHH) may be relevant, as they provide a framework to control the risks from a range of hazardous substances. Whether such obligations towards tenants exist under COSHH largely depends on the level of control a landlord has over the property, which will itself be determined both by the terms of the lease granted and the physical characteristics of the property.
If a landlord does have obligations under COSHH, or other health and safety legislation regarding the premises it lets, it should assess the risks of COVID-19 and may need to take preventative measures. In a confirmed case of COVID-19, however, measures will primarily be dictated by Health Protection Scotland (HPS), and following these will be the best way to comply with health and safety obligations. Indeed, regardless of the diagnosis of a case of COVID-19, guidance from HPS or the Government should be followed in relation to cleaning and so on.
We all hope that the health risks and disruption caused by COVID-19 are kept to a minimum, but where there are issues then you should carefully consider and keep evidence of:
- The current government guidance at the time you are making your decision
- The terms of the lease
- Emails and correspondence with the other parties to the lease, including attempts to seek agreement to a specific course of action
- Any written advice from health and safety professionals, solicitors or others
If you have any questions about your obligations in relation to the above, please do not hesitate to contact a member of our Commercial Property team.