Out-Law Legal Update
Tribunal: no UK tax deduction as company did not carry on management activities itself
Partner, Co-head of International Arbitration
Out-Law Guide | 04 Jun 2020 | 11:52 am | 11 min. read
The necessary legislation for England, Wales and Northern Ireland is included in the Coronavirus Act. In Scotland the necessary legislation is included in the Coronavirus (Scotland) Act.
As additional restrictions on movement and businesses are announced by the government in an attempt to control the spread of the outbreak, landlords may struggle with the impact on their buildings and rental income. Some of the potential issues for landlords of commercial properties in particular are set out below, but specific legal advice should be sought before any action is taken.
It is unlikely that a tenant will be able to argue that the lease has been frustrated.
The bar for termination of a lease by 'frustration' is high: it applies where supervening events unprovided for in the lease significantly alter the parties' obligations and bring the lease to an end. While the restrictions placed on the use of some premises because of the coronavirus pandemic might be considered a supervening event, it is unlikely that a temporary inability to occupy the premises would meet this test.
However, the terms of the lease and the length of the interruption to occupation may be relevant.
Where the tenant has a contractual break, the pandemic may make it more likely that the tenant exercises that break.
Probably not. Very few leases contain a 'force majeure' clause which could allow either party to say that the obligations in the lease are suspended because of Covid-19.
The bar for termination of a lease by 'frustration' is high: it applies where supervening events unprovided for in the lease significantly alter the parties' obligations and bring the lease to an end. It is unlikely that a temporary inability to occupy the premises would meet this test.
In most leases the obligation to pay the rent is only suspended, or the amount of rent reduced, where there has been "damage" to or "destruction" of the premises by an insured risk or, in some cases, an uninsured risk. Covid-19 itself does not cause physical damage to or destruction of premises, so these provisions are unlikely to be engaged.
Turnover rents in retail leases will be significantly impacted where premises are forced to close.
As a landlord, you may decide to defer, reduce or entirely suspend the rent for a period to avoid tenant insolvency. Any decisions of this type must be documented very carefully.
If a lease was frustrated, as above, it is possible that any advance payments of rent would be repayable.
As above, very few leases contain a force majeure clause which could allow the landlord to suspend its obligation to provide any services.
However, check the lease to see if the obligation to provide services contains exclusions such as in respect of matters outside the landlord's control, or if the obligation is only to use reasonable endeavours to provide the services. In the latter case, if the coronavirus makes it impossible to provide the services using reasonable endeavours – for example, due to staff or contractor sickness – you should not be liable for any failure to provide the services.
Provision of services should take account of the restrictions and requirements for social distancing under the Coronavirus Act 2020 and guidance from Public Health England (PHE) and Health Protection Scotland (HPS). This guidance is being reviewed and updated regularly.
This will depend on the terms of the lease. An obligation to clean, and keep safe, the common parts of the premises may well cover deep cleaning. It would be unusual for there to be any obligation on a landlord to clean demised premises leased to individual tenants as opposed to the common parts, or for there to be any right of access to enable the landlord to do so.
However, it may not be practical to deep clean the common parts without also cleaning the demised premises. You must also comply with your obligations under UK health and safety law, which require landlords to do everything reasonably practicable to ensure the health and safety of their employees and to ensure people working in or visiting a building are not exposed to risks to their health to the extent that the landlord has control of the premises. To the extent that you do not have control, your tenants must also comply with their own health and safety law obligations.
You should keep up to date with any relevant government guidance on workplace Covid-19 related measures.
Again, this will depend on the terms of the lease. Landlords will often have the right to provide and charge for additional services – such as for good estate management or other reasonable reasons - and this may extend to deep cleaning or other protective measures.
Where the lease provides for the recovery of costs incurred in the supply of services the landlord considers it has become usual to provide in similar buildings, or where enhanced cleaning follows government recommendations, then it should be possible for the landlord to recover the additional cost.
Some premises are required by law to be closed to members of the public. Under the 2020 Health Protection (Coronavirus, Restrictions) (England) Regulations and corresponding regulations for Wales, Scotland and Northern Ireland, these include:
Closure of the building might mean you face claims from tenants for breaches of landlord covenants, in particular covenants for quiet enjoyment and not to derogate from grant.
If closure is required by law or in accordance with PHE or HPS advice, then this could provide a defence to any claim for breach of landlord obligations under the lease. If closure goes beyond what is legally required or recommended by the guidance, then the landlord may be liable for tenants' losses as a result of breach of covenant.
Closure, whether or not in accordance with PHE or HPS guidance or legally required, will not usually result in rent suspension or termination rights under the insurance provisions becoming relevant unless there is physical damage to the premises although the lease drafting and relevant insurance policy should be checked. Again, where closure goes beyond what is legally required or recommended in PHE or HPS guidance the tenant may have a claim for breach of covenant.
The landlord will have health and safety law duties towards any of its own employees working in the building.
Probably not. Even if the tenant has a claim for breach of covenant, if, as is common, the lease says that rent is payable without deduction or set off, they should continue to pay the rent and then seek to recover damages for breach of covenant as a separate action.
Rent suspension provisions are unlikely to apply, but the wording of the lease should be checked.
Where there is no legal requirement for the building to be closed, consultation with the tenant in relation to any potential closure may help to minimise the risk of litigation in the future.
Where the relevant Health Protection Regulations require closure, the tenant must close the premises to members of the public. This does not mean that the premises cannot be used for aspects of the tenant's business which do not involve public access to the premises, such as processing online orders.
Otherwise, the tenant can choose to close its premises unless the lease contains a 'keep open' clause or clause requiring the premises not to be left empty for a period which the closure exceeds. Courts are reluctant in some cases to enforce keep open clauses by requiring tenants to stay open, but damages may still be awarded for breaches. If the closure is required by law or in line with PHE or HPS guidance, it is unlikely that any keep open covenant or covenant not to leave the building empty would be enforceable.
You should check whether leases provide for the tenants to notify the landlord if the premises are left empty, as this may affect your insurance. It is a good idea to liaise with tenants where possible about their intentions, so that you can inform the insurers when buildings are empty.
Without specific legislation, this would not alter the parties' obligations under the lease. However, the obligation to comply with statute may remove the right of either party to enforce any covenant that had been breached.
Government intervention may make it easier for tenants to claim on their business interruption insurance.
This will depend entirely on the provisions of the lease.
If the lease contains a tenant's covenant to comply with reasonable regulations the landlord makes from time to time, a regulation which required tenants to follow PHE or HPS guidance would be reasonable.
Not unless there is a specific provision in the lease, which would be unusual. However, there may be commercial or reputational reasons why you would want to engage with the tenants in respect of any request, particularly where necessary to avoid tenant insolvency.
Significant changes have been made, or are in the course of being made, to landlords' remedies during the Covid-19 pandemic. The following changes have been made to a landlord's ability to end a lease and secure possession of premises.
Sections 82 and 83 of the Coronavirus Act impose a three-month moratorium on landlords' ability to forfeit leases of commercial property for non-payment of rent in England and Wales, and Northern Ireland, respectively.
The relevant provisions of the Coronavirus Act apply to the vast majority of commercial leases, but not most leases for terms of less than six months. They prevent landlords from taking any action to forfeit for non-payment of rents or other sums, including service charges and insurance rent, from 26 March until 30 June 2020. This period may be extended. The Act provides that in any existing proceedings there can be no order for possession before 30 June (although in England and Wales this now appears to be superseded by the new measures relating to possession proceedings referred to below).
Despite sections 82 and 83, forfeiture by peaceable re-entry would still be available to a landlord for breaches unrelated to non-payment of rent or other sums due.
Section 81 of the Act provides for similar protections from eviction - by extension of notice periods - for tenants of many types of residential property tenancies in England and Wales, including assured and assured shorthold tenancies. The notice period required for landlords to terminate many residential tenancies in Northern Ireland has been extended too under the 2020 Private Tenancies (Coronavirus Modifications) Act (Northern Ireland).
A new Practice Direction under the Civil Procedure Rules (PD 51Z) issued on 27 March 2020 and amended on 17 April provides for a stay for all possession proceedings in England and Wales for 90 days from 27 March 2020. It does not apply to possession proceedings for trespass against "persons unknown" or to applications for interim possession orders against trespassers and does not prevent case management directions being agreed by the parties.
In Scotland, a landlord may only terminate, or 'irritate', a lease after it has given the tenant a period of time within which to remedy the breach. The Coronavirus (Scotland) Act extends the period of time to 14 weeks for non-payment of rent, effectively creating a block on a landlord on terminating during that period. Previously the landlord only had to give 14 days' notice before bringing the lease to an end. The 14 week period may be extended by the Scottish government under the Coronavirus (Scotland) Act. There is no statutory relief from irritancy in Scotland so if the tenant does not clear the rental arrears within the 14 week period the landlord will be entitled to issue a notice to terminate the lease should they wish to do so.
The Coronavirus Act protects landlords in England, Wales and Northern Ireland from inadvertently waiving the right to forfeit for non-payment of rent or other charges during the moratorium period. You can therefore continue to demand rent and deal with requests for consent etc. under the lease without waiving the right to forfeit for non-payment of arrears.
However, if you want to forfeit for some other breach of the lease, the usual rules apply and you will need to stop demanding rent or taking any other action consistent with the continuation of the lease.
In Scotland, there have been no changes to the procedure regarding non-financial irritancy in the Coronavirus (Scotland) Act. Acceptance of rent after the lease has been irritated can be construed as a waiver of the irritancy in certain circumstances. Landlords should exercise caution after an irritancy notice has been served if the tenant attempts to make further rental payments.
It is important to note that the Coronavirus Act does not suspend the right to rent or other payments, only the right to forfeit the lease for non-payment until the moratorium ends. While the moratorium applies, landlords retain the right to charge interest on the arrears at a rate specified in the lease; to bring debt recovery proceedings against tenants; and to have recourse to parent company or other guarantors, rent deposits or other forms of security for payment. However, the following changes have been made, or are due to be made, which affect other landlords' remedies.
The minimum amount of net unpaid rent required before you can exercise CRAR in England and Wales has been increased to an amount equal to 90 days’ rent. However, remember it is not possible to enter unoccupied premises in order to exercise rights under CRAR.
On 23 April 2020, the government proposed a temporary halt to the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions (from 27 April 2020) where the company was unable to pay its bills because of coronavirus. It proposed that this would be in force until 30 June 2020, subject to any extension in line with the moratorium on forfeiture.
The draft legislation has now been published in the Corporate Insolvency and Governance Bill, and is expected to be in place shortly. In the meantime, courts are already taking the government guidance on this into account in applications for winding up petitions but have recently refused injunctions to prevent such petitions in respect of debts owed long before the pandemic arose.
The draft legislation provides that, between 27 April and 30 June, no petition to wind up a company in England, Wales, Scotland or Northern Ireland can be presented on the ground that the company has not paid sums due under a statutory demand served after 1 March 2020. It further provides that a winding-up petition cannot be presented between 27 April and 30 June or one month after the coming into force of the legislation, whichever is later, unless the creditor has reasonable grounds to believe that coronavirus has not had a financial effect on the debtor or that the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on it. If a petition is presented and it appears to the court that coronavirus has had a financial effect on the debtor, the legislation will prevent a winding-up order being made unless the court is satisfied the debtor could not have paid its debts even if there had been no such financial effect. The UK parliament has the power to extend these periods.
All other landlord remedies for non-payment of rent in Scotland remain available: for example penalty interest, summary diligence.
Out-Law Legal Update
Tribunal: no UK tax deduction as company did not carry on management activities itself
Partner, Co-head of International Arbitration