Coronavirus and Commercial Leases

Almost all commercial leases will be affected by the current coronavirus emergency. As commercial tenants find their businesses struggling, cash flow will become a real problem: rent may not be paid; premises will shut; and landlords will struggle in turn. This note will consider some of the issues that will be front and centre of both tenants' and landlords' minds.

The Coronavirus Bill

The Coronavirus Bill (HC Bill 122; HL Bill 110), due to come into force on 25 March or 26 March 2020, as introduced said little about business leases directly. As at the evening of 23 March 2020, however, a raft of further amendments have been introduced dealing with business tenancies, going into clause 82 as of 25 March 2020. In particular, the government is proposing to provide protection from forfeiture for non-payment of rent. This will apply to 'business tenancies' as defined in Part II of the Landlord and Tenant Act 1954 (whether or not they are contracted out of the Act). During the 'relevant period' (from when the Act is passed to 30 June 2020, or as further extended by statutory instrument), it is envisaged that rights of re-entry (by action or peaceable re-entry) may not be enforced, while at the same time, only an express waiver in writing will act to waive a right of re-entry for non-payment of rent. The proposed amendment will also change the time period when possession may be granted (either under subsections 138(3) and (4) of the County Courts Act 1984 or the inherent jurisdiction of the High Court) to after the end of the relevant period.

Persistent delay in paying rent during the relevant period will be disregarded for the purposes of section 30(1)(b) of the 1954 Act (one of the grounds of possession in that Act) if the proposed amendment is accepted.

There is nothing, yet, about Commercial Rent Arrears Recovery (CRAR). Until this is dealt with, commercial landlords might well wish to consider this as a possibility to recover rent arrears.

Government assistance

The government have announced a raft of measures aimed to support businesses through the severe economic turbulence caused by the coronavirus crisis. This support includes:

• 12-month business rates holiday for all retail, hospitality and leisure businesses in England for the 2020 to 2021 tax year. Businesses that received the retail discount in the 2019 to 2020 tax year will be rebilled by their local authority as soon as possible. There is no action required to be taken. It should apply automatically to the next council tax bill in April 2020.
• Additional Small Business Grant Scheme funding for local authorities to support small businesses that already pay little or no business rates because of small business rate relief (SBBR), rural rate relief (RRR) and tapered relief. This will provide a one-off grant of £10,000 to eligible businesses to help meet their ongoing business costs.
• The Retail and Hospitality Grant Scheme will provide businesses in the retail, hospitality and leisure sectors with a cash grant of up to £25,000 per property with a rateable value between £15,000 and £51,000.
• Business interruption loans for SMEs. The Government will provide lenders with a guarantee of 80% on each loan (subject to pre-lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs. The scheme will be delivered through commercial lenders, backed by the government-owned British Business Bank.
• All businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC's Time To Pay service. These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.

Business tenants may well have more available cash than they thought.

Government restrictions

The Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 oblige restaurants, cafes, bars and pubs to close premises on which food or drink are sold for consumption, and to cease felling food or drink for consumption on its premises. An area adjacent to the premises of the business where seating is made available for customers of the business, such as a picnic table area, (whether or not provided by the business) is specifically to be treated as part of the premises of that business, and as such, must also be closed. Notably, food or drink sold by a hotel or other accommodation as part of room service are not treated as being sold for consumption on its premises.

A person who, without reasonable excuse, contravenes the ban, commits an office punishable on summary conviction by a fine. A person, designated by the Secretary of State, may take such action as is necessary to enforce a closure or restriction.

Although there is not currently sight of light at the end of the tunnel, the Secretary of State must review the need for restrictions imposed by this regulation every 28 days, with the first review being carried out before the expiry of the period of 28 days starting with the day after the day on which these Regulations are made. As soon as the Secretary of State considers that the restrictions set out in this regulation are no longer necessary to prevent, protect against, control or provide a public health response to the incidence or spread of infection in England with the coronavirus, the Secretary of State must publish a direction terminating the relevant period.

Ease of planning rules on takeaways

The Government has announced that planning rules will be relaxed so that pubs and restaurants can operate as hot food takeaways during the outbreak.

The government will introduce a time limited permitted development right through secondary legislation (by way of the negative resolution procedure) to allow the temporary change of use of a pub (A4 - drinking establishment) and a restaurant (A3 – restaurants and cafes) to a hot-food take away for a period of up to 12 months only.

Businesses will be required to tell the local planning authority when the new use begins and ends.

Covenants to stay open

Many retail and other commercial leases contain covenants that the premises will remain open during trading hours. In Cooperative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, the term read as follows:

'To keep the demised premises open for retail trade during the usual hours of business in the locality and the display windows properly dressed in a suitable manner in keeping with a good class parade of shops.'

This term can be qualified, so that it does not apply where an insured risk takes place preventing the premises from opening, or some other reason or force majeure event prevents the business from opening. Government restrictions on restaurants and pubs opening, for example, might well take precedence on a proper construction of the lease. Some leases make it clear that this kind of covenant does not apply where it would be unlawful to do so, which might well be the case for non-essential shops.

These clauses are beneficial for both landlords and other tenants. If a shopping centre or retail park has a number of closed units it can dissuade customers from visiting other businesses. On the other hand, the business might well be trading at a loss if it remains open. The last few weeks have seen a number of major retail chains announce that their shop premises are closing due to declining visitor numbers, while retaining online presences and 'click and collect' facilities. This could have the effect of depressing turnover rent in the next rental period, as online shopping may not show up in any rent calculation.

The landlord will struggle, however, to obtain an order for specific performance requiring the premises to re-open. Lord Hoffmann in Cooperative Insurance Society Ltd emphasised that such a remedy is almost never available to a landlord. It might also be difficult for a landlord to prove that any damages have been caused by the breach of a covenant to stay open in light of government restrictions on retail outlets.

Forfeiture

The proposed section 82 of the Coronavirus Bill deals with forfeiture on the grounds of non-payment of rent. For some leases falling outside the LTA 1954, or where the landlord wants to forfeit for breach of covenant other than failure to pay rent, the following considerations will apply.

A landlord might well become frustrated at the tenant's failure to pay rent or to abide by covenants such as to keep trading from the premises. Such a landlord might, however, want to pause before forfeiting the lease. Forfeiture brings the tenancy to an end: it might well be difficult for the landlord to find a new tenant, especially if there are planning restrictions as to the types of uses which be carried out from the premises. It is unlikely, for example, that there will be much demand for class A3 or class A4 premises in the near future for immediate occupancy. The landlord might prefer to hold on to a tenant, so as to at least hold on to the promise of further rent or to claim from a guarantor.

A further problem that the landlord might face if it brings a claim for forfeiture through court proceedings rather than through peaceable re-entry is that the courts are facing not inconsiderable pressure due to the need to protect court users and facilitate social distancing. Commercial lease possession cases are being adjourned and are unlikely to be regarded as priority cases.

If the tenant becomes insolvent, it might become necessary to obtain the consent of the relevant insolvency practitioner or permission of the court to forfeit the lease, whether or not the landlord intends to proceed by way of peaceable re-entry or by court proceedings, depending on the insolvency procedure. For example, if the tenant company goes into administration under Schedule B1 of the Insolvency Act 1986, the landlord will need to seek the consent of the administrator or permission from the court to peaceably re-enter the premises (paragraph 43(4), Schedule B1, Insolvency Act 1986) or to begin or continue any court proceedings (paragraph 43(6), Schedule B1, Insolvency Act 1986).

Break clauses

Tenants may be looking to exercise break clauses in order to escape commercial leases. The usual rules as to break clauses, however, will apply. Compliance with their terms will be strictly applied.  This also applies to the break period and the service provisions. Furthermore, a tenant must ensure that it complies with provisions as to the delivery of vacant possession, payment of rent up to the break date, and compliance with covenants in the lease, if these are expressed to be conditions precedent to the exercise of the break clause. This might be difficult in Covid-19 conditions: the tenant might struggle paying the rent and there may be a dispute if the premises cannot be kept open, for example.

Tenant insolvency

We are considering here commercial tenancies; different rules apply to residential tenancies. The starting point for a landlord when the tenant starts to fall into arrears is:

• Sue for the arrears and recover as a debt
• Forfeiture (although as noted above, the Coronavirus Bill will affect this remedy)
• Commercial rent arrears recovery ("CRAR") – the remedy of distress was abolished and replaced by CRAR: section 71, Tribunal Courts and Enforcement Act 2007.

However, the defaulting tenant may be on its way to insolvency. In that case, the usual remedies of suing in debt, forfeiture or CRAR, may not be available: the key provisions are the Insolvency Act 1986 (IA 1986) and the Insolvency (England and Wales) Rules 2016 (IR 2016). It should be noted that references in IA 1986 to distress are now to be read as references to CRAR: section 436 IA 1986 (as amended). The following are possible outcomes following the insolvency of companies.

CVA: See sections 1 to 7B, IA 1986. A "small" company can apply for a moratorium on proceedings brought by creditors: section 1A and Schedule A1 of the IA 1986. Like an individual voluntary arrangement, it is essentially a consensual process whereby the creditors agree by a qualifying decision procedure to accept the proposal.  If the proposal is accepted, all creditors are bound by it. An insolvency practitioner acts as nominee and supervises the CVA. If there is already an administrator or a liquidator in place and they propose the CVA, they will usually be the nominee and supervisor. The landlord will, like the other creditors, only receive a proportion of what is due to it under the terms of the lease.

Once a CVA is applied for, a moratorium comes into effect and the landlord cannot take any enforcement action without the leave of the court:  Sch 1A, para 12(1)(f).

Administration: (Schedule B1, IA 1986). The purpose of administration is:

• Rescue of the company (cf business being carried on)
• The achievement of a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration)
• The realisation of some or all of the company's property to make a distribution to one or more secured or preferential creditors

The purpose of the administration should be to rescue the company as a going concern unless it is not reasonably practicable to do so, or that a better result could be obtained for creditors by not doing so. Sch B1, para 3, IA 1986.

As with a CVA, the consequence of administration is that a moratorium applies, so that a landlord cannot exercise the remedy of forfeiture or other legal proceedings: Sch B1, para 3, IA.

Administrative receivership: In respect of floating charges created on or after 15 September 2003, (other than large capital project etc. cases, see sections 72A to 72GA IA 1986) a floating charge holder generally only has a right to appoint an administrator.

The administrative receiver must act to realise the security of the chargee in order to repay the debt. The administrative receiver is the agent of the debtor company: section 44, IA 1986. The property of the company remains vested in the company, unless and until the administrative receiver has exercised his power of sale: section 42 and paragraph 2, Schedule 1, IA 1986. These are rare now.

Again, the effect of the administrative receivership is that the usual landlord remedies cannot be exercised without the consent of the court or the receiver. There is no power for an administrative receiver to disclaim the lease.

Law of Property Act 1925 receiver (LPA receiver): Unlike receivership or administration, the appointment of the LPA receiver does not affect the usual remedies open to a landlord and the LPA receiver has no power to disclaim the lease.

Winding-up (or liquidation) (sections 73 to 219 and 230 to 246, Part IV, VI and VII, IA 1986): Winding-up can be compulsory, i.e. pursuant to a creditor petition, or a voluntary winding-up, members or creditors.  Winding-up is the death of the company. The general position is that once a winding-up order has been made, permission of the court is generally needed for enforcement. The landlord is in the position of other unsecured creditors with no better remedy.

Whether it is a voluntary or compulsory winding-up, the liquidator has power to disclaim the lease.

Force majeure

While force majeure is recognised in certain civil jurisdictions, it is not a term of art in English law. Nevertheless, the incorporation of force majeure provisions is common in commercial contracts. For example, the effect of the Force Majeure (Exemption) Clause of the International Chamber of Commerce, 2003) I.C.C. Publication No.650.832 is that a party is not liable for failure to perform any of his obligations in so far as he proves:

• that the failure was due to an impediment beyond his control;
• that he could not reasonably be expected to have taken the impediment and its effects upon his ability to perform the contract into account at the time of the conclusion of the contract; and
• that he could not reasonably have avoided or overcome it or at least its effects.

In British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 W.L.R. 280 a clause that "the usual force majeure clauses to apply" was held to be void for uncertainty because such a term could refer to clauses usual in a particular trade.

It may be rather more straightforward if the clause expressly refers to pandemic or epidemic, but even without such specific reference,  it has been held that force majeure is wider than "Act of God" of vis major: see Matsoukis v Priestman & Co [1915] 1 K.B. 681, 686; Lebeaupin v Crispin & Co [1920] 2 K.B. 714, 719, so coronavirus may well fall within force majeure.

Where there is an unqualified reference to force majeure, this will usually be interpreted as only being available where the relevant obligation is impossible not merely hindered or made more onerous.

Frustration

In the seminal case of National Carriers v Panalpina (Northern) [1981] A.C. 675  Lord Simon of Glaisdale said

'Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.'

Traditionally, the courts of England and Wales have been reluctant to find that a lease has been frustrated. After all, a lease is an estate in land, and land cannot be destroyed. However, the courts have in limited cases allowed the doctrine to operate in respect of a lease.  In the case of Cricklewood Property and Investment Co. v Leightons Investment Trust [1945] A.C. 221 war time planning measures meant that a development could not proceed and it was said by Viscount Simon L.C. "…Where the lease is a simple lease for years at a rent, and the tenant, on condition that the rent is paid, is free during the term to use the land as he likes, it is very difficult to imagine an event which could prematurely determine the lease by frustration - though I am not prepared to deny the possibility, if, for example, some vast convulsion of nature swallowed up the property altogether, or buried it in the depths of the sea."

On the other hand, in Northern Estates Company v Schlesinger [1916] 1 KB 20 a landlord let a flat in Westcliffe on Sea for three years to an Austrian national, just before the outbreak of the first world war. When war broke out, the tenant was classed as an alien enemy and legislation was passed making it illegal for him to live in coastal areas. The claim that the lease was frustrated failed as not all the benefit the tenant expected to derive from the lease was taken away – he could still assign or sub-let.

As a result of decision to leave the EU, the European Medicines Agency wished to vacate London office and argued that Brexit had frustrated its lease as it was forced to relocate to another member state. The High Court did not agree. See Canary Wharf Limited v European Medicines Agency [2019] EWHC 335 (Ch). We do not consider it likely that a court would that Coronavirus was comparable to "some vast convulsion of nature [that] swallowed up the property altogether" so as to hold a lease to be frustrated.  In our view, it is therefore unlikely that you could successfully argue that the lease has been frustrated.