Coronavirus - Impact On Commercial Property 

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Coronavirus should be high on the agenda of anyone who owns, occupies or manages a building.

If you control a building

Those who control a building must comply with all legislation in respect of that building, not least Health and Safety requirements. Points to consider specific to coronavirus are:

  • Following any guidance from government
  • Consideration of the health of direct staff (receptionist/cleaners/security)
  • Provision of hand sanitizers
  • Extra cleaning/rubbish removal
  • Potential deep-clean of the building – there is currently no obligation for a property owner to deep clean, but many are taking this pragmatic step.
  • Facilitation of self-isolation. If a person is suspected of coronavirus they may need to self-isolate immediately away from others and behind a closed door. This is more of a challenge if the building is a warehouse or a shopping centre.

Who pays for the cost of complying with coronavirus related measures?

The cost of compliance with coronavirus related measures in relation to the common parts of a building may be able to be passed onto the tenant depending on the wording of the service charge provisions in the lease. Both landlords and tenants should check their leases to see the specific provisions. Look for wording which include in the service charge costs incurred in providing services for “good estate management” or “required by statute” as this type of wording could enable the costs to be passed to the tenant. The tenant will be responsible for any costs related to its own premises.

Services to a serviced building cannot be provided or the building must be closed

If services cannot be provided to a serviced building this could impact on the tenant’s ability to run its business or could even mean that the building must be closed.

The issue for the landlord is that, unless the lease provides that the services are provided at the landlord’s discretion, then any interference with the tenant’s ability to run its business could be a breach of the quiet enjoyment clause in the lease or a derogation from grant. The quiet enjoyment clause in a lease is a covenant by the landlord with the tenant that it will not interfere with or disturb the tenant’s use of the property. Derogation from grant occurs where a landlord takes positive steps that render the property unfit for the purpose the lease was granted.

Whether there is a breach or not will depend on the actual wording of the lease. The “compliance with laws” clause may assist, as this will often state that the tenant must comply with any notice or other communication affecting the property (whether or not served pursuant to any law). This would only be of help if the government guidance requires businesses to close.

A breach of covenant/derogation of grant could include a claim for loss of income.

Who is responsible for rent where a building is closed?

It is very likely that the obligation on the tenant to pay rent will continue. Most leases contain a rent suspension clause, but this clause is usually only triggered where a property is damaged by an insured risk and therefore is unlikely to be of assistance. However, it is always important to check the actual wording of the lease as where the property has to be closed and deep cleaned there may be an argument that there has in fact been ‘damage’ to the property which may cause the rent suspension provisions to bite.

“Keep open” clause

Some leases of retail space contain a “keep open” clause which requires the tenant to keep the premises open between certain times. If the building has to be closed, then the tenant will be in breach of this clause of the lease. However, the tenant also needs to comply with the “compliance with laws” clause , where clear Health and Safety guidance issued by government necessitates closure of the shopping centre, this is likely to trump the requirement to comply with the “keep open” clause but this hasn’t been tried in the courts.

Can insurance help?

Business Interruption Insurance may assist depending on the exact wording of this cover. Often insurance policies exclude losses caused by communicable diseases “or the fear thereof”. However, policies may cover the compulsory closure of the property in a ‘notifiable disease’ extension. Coronavirus has now been registered as a notifiable disease in the UK.

Tenants may also want to consider if any business disruption insurance they hold will allow them to recover losses suffered due to the building closure.

A lot of policies only kick in if the premises have suffered physical damage or loss and it would be hard to prove that this has happened as a result of coronavirus although as mentioned above there may be an argument that where a property is required to have a deep clean that this could constitute “property damage”.

Can I end the lease?

Leases don’t usually contain a force majeure clause allowing parties to end the lease. Instead the parties have to rely on frustration. However, if a lease is frustrated it will immediately come to an end and isn’t a suitable remedy for where there is a temporary frustrating event. In addition, although in principle frustration can apply to leases the bar to prove frustration is very high – as yet there are no cases in England and Wales where a lease has been held to be frustrated.

If the lease contains a break clause the party with the benefit can exercise this provided the conditions are met. Alternatively, both parties can agree to end the lease.

Practical steps for a landlord or tenant where business interruption is likely as a result of coronavirus could include:

  • Reviewing the obligations in the lease with regard to coronavirus
  • Keeping up to date with the latest guidelines issued by the government
  • Consider including epidemic provisions in any new leases
  • Communicate with your tenants and agree a coordinated programme of measures where possible.

For more information please contact a member of our Commercial Property Team

RELATED:   COMMERCIAL PROPERTY TEAM


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