The coronavirus pandemic is completely unprecedented and brings with it unique and far-reaching issues for both commercial tenants and landlords to navigate. Many small business owners have already written to landlords asking for a commercial rent freeze while the pandemic goes on.
Can I go on a rent strike?
Many businesses will want to know what their rights are in a situation where they are prevented from opening business due to an “act of God” or force majeure. Can they unilaterally freeze rent payments where they are shut down, whether through enforced staff absence or official decree, as we have seen this week across the leisure and hospitality industry?
What if the government forces my small business to close?
As a starting point, in the absence of specific contractual provisions, there is no common law right to include a deemed “force majeure” provision in the lease document. Commercial leases often contain rent suspension provisions for damage to property arising out of certain specified risks, but those rent suspension provisions do not normally extend to cover enforced closure of retail or other units pursuant to statutory powers.
Therefore, in the absence of a specific force majeure clause in the lease or a statutory provision to the contrary, the tenant is contractually obliged to continue paying rent – even if their doors are forced to close, ending business as usual and rendering them unable to make those payments.
What about ‘derogation of grant’?
The tenant’s only possible legal challenge could be to argue “derogation of grant.” However, that common law right is normally only available in situations where the landlord has acted in a way which substantially compromises a benefit granted to the tenant in the lease document. In industries like leisure and hospitality, which have been forced to close stores and commercial premises by government order, it would perhaps be too far a leap to lay the blame at the feet of the landlord.
What about business interruption insurance?
The best course of action for businesses is to consult their business interruption insurance if they have it, and of course providing it covers this type of situation, which it may well not. Current business interruption insurance policies may have an additional diseases clause – usually only taken out by larger firms – and, in any case, because Covid-19 is a certainty it cannot be deemed a risk and so insurers will not pay out.
Negotiating a commercial rent freeze
While the tenant isn’t in a particularly strong position in the absence of express wording in the lease, landlords are facing their own pressures and will be keen to adopt a commercial approach.
A tenant does not become a “bad tenant” overnight, so if the landlord feels that the occupier is able to weather the storm, they will at least have a tenant in place once we do reach calmer waters. The alternative for the landlord is forfeiting and risking an empty unit which they’re unable to fill for the foreseeable future.
Open and honest dialogue is the best way forward for both landlords and tenants.
Simon Maddox is a real estate partner at JMW Solicitors
Further reading on coronavirus