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20 Mar 2020

Forced and voluntary closure of premises: key points for landlords

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Covid-19 presents a rapidly evolving situation. Landlords need to be able to respond quickly, so here is the key information that you need to know if you are thinking of, or forced to, close your premises.

Mandatory closures

1. Can tenants sue landlords if the Government mandates the closure of premises (such as shops, restaurants, offices)?

No.  There is no breach by the landlord, as it is not the landlord’s actions which are preventing the tenant from using the premises.

2. Can tenants demand a rent holiday if the Government mandates the closure of premises?

The first point to check is whether any future Government order contains provisions regarding rent suspensions (as has been the case in other jurisdictions).

If not, then, the general position is that no, tenants cannot claim rent holidays, although it is necessary to check the terms of the lease (the clause dealing with rent suspension).  In most leases, the rent suspension only kicks in where the premises are damaged or destroyed by an insured risk, or where access becomes impossible as a result of damage or destruction by an insured risk. There may however be some rare leases where the rent suspension applies where access becomes impossible for any reason.

3. What are tenants to do if the Government mandates closure?

Some tenants may be able to look to their own business interruption cover if the premises are forcibly closed, although it has been reported that many policies do not cover Covid-19.  Tenants should consult their brokers.

However, even though most tenants will not have a legal right to suspend rent payments, they are likely to face difficulties paying rent due to the drop in income.  Landlords should consider whether it is in their interests to offer payment holidays, a switch to monthly rather than quarterly payments, or to agree a payment schedule, in order to enable the tenant’s business to survive.  We are aware of several landlords offering concessionary measures of this nature. Landlords who seek to enforce their strict rights risk a raft of tenant insolvencies, together with the reputational damage of being seen to be taking an unsympathetic approach in the current crisis.  

There are likely to be some tense discussions on and following the March quarter day next week (25th).  Any concessionary arrangement should be properly documented to avoid storing up problems for the future when the landlord wants to revert to the strict lease terms.

4. Can tenants claim that a mandatory closure allows them to walk away from the lease?

Unlikely. A tenant may try to rely on the legal doctrine of “frustration”, which allows contracts (including leases) to be terminated where an unforeseen event, which is not the fault of either of the parties, renders contractual obligations impossible or illegal, or radically changes the purpose of the contract.

However, in most cases temporary closures are unlikely to frustrate a lease. There is case precedent that a 20 month closure of the only access road to a premises, during a 10 year lease, was insufficient to amount to frustration (National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675). That closure was for one sixth of the term, which would equate to 10 months out of a 5 year lease. The court did not express a view on the precise length of closure that would be needed to amount to frustration, but it is likely to be considerably more than one sixth. 

Therefore the only situation where tenants are likely to be able to walk away from a lease is where the closure is for substantially the whole amount of the term, such as

  • a pop up event in connection with a particular sporting or theatrical activity which is no longer going ahead, or
  • a short term lease of a kiosk within a shopping centre where the centre is closed for the whole or virtually the whole of that period.

These situations are more akin to an earlier case, Krell v Henry [1903] 2 KB 740, where a flat had been rented out for the purpose of watching the King’s coronation.  The court held that when the coronation was postponed the contract was frustrated. Where frustration does apply, the lease is terminated altogether, not suspended. It does not come back to life when normality returns. There are special rules regarding the allocation of loss between the parties.

Force majeure

Tenants may also argue that the COVID-19 outbreak amounts to a “force majeure” event.  ‘Force majeure’ is a contractual concept which only applies where specified in the lease. This argument is unlikely to succeed in relation to a lease, as it is very unusual to see a force majeure clause in a lease. However, force majeure clauses are sometimes found in an agreement for lease. One would then have to look to the clause to see what counts as force majeure and the consequences.  Construction contracts may also be subject to force majeure/extensions of time depending on the contract terms and facts.

5. Landlord’s insurance cover

Landlords/managing agents should be speaking to their brokers for guidance on the terms of their policies to see if it covers them for business interruption or loss of rent caused by notifiable diseases or government action.  Any terms of the insurance policy (e.g. as to notifying claims) should be strictly complied with.

Voluntary closures

Many landlords are wondering what their rights and obligations are with regard to keeping open their premises. Could they be at risk of liability if they do, or equally might they face liability if they don’t?

1. Should landlords be considering voluntary closure of premises?

This is only a headache for landlords of multi let premises, where landlords will have control of common parts and need to make such decisions. Where there is a lease of whole, the control of the building will have been devolved entirely to the tenant.  

Landlords should be considering their duties to all persons who might potentially be affected by a decision.  It is not an easy decision and there will be no one size fits all approach. It will depend on weighing up all the circumstances. These include the following.

  • Risk profile – have there been any been reported cases of Covid-19 in any part of the premises themselves, in which case temporary closure may well be necessary for a deep clean?  How many cases have there been in the wider locality?  What are the premises used for – is it a particularly risky use with a lot of people congregating?
  • Duties to employees.  Landlords will owe duties to their own employees under health and safety at work regulations and should take appropriate precautions to keep employees safe (eg increased cleaning, especially of commonly touched surfaces such as door handles; making sure all employees are encouraged to wash their hands frequently; observing as a minimum the government guidance on isolating at home staff who are ill or at risk; and considering how to protect any particularly vulnerable staff with health conditions).  If the landlords have employed managing agents then it is likely to be the agents rather than the landlord itself that will need to wrestle with this issue.
  • Duties to third parties using the premises (eg office workers, shoppers).  It is unlikely that third parties would succeed in establishing claims against landlords as it will be difficult for any person to show where they caught the disease, but this is a further factor to include in the mix of decision making.
  • Terms of the lease – do these permit closure on estate management or health and safety grounds?  Would the landlord be at risk of claims from tenants if it does close the premises?
  • Tenants’ viewpoint – practically speaking would the tenants be supportive of a closure? For example, tenants may support a closure if there are no customers anyway and this would save on service charge, or where they have insufficient staff to open their business anyway, or are concerned about their own staff’s safety.
  • Is it safe to keep the premises open – does the landlord have enough security and maintenance staff and cleaners? The latter are especially important.  There may also come a time where so many of the landlord’s staff are ill or self-isolating that the landlord has to consider whether it can no longer keep the premises open.
  • The landlord’s insurance policy - does the landlord’s insurance policy contain any relevant provisions which have a bearing on the situation or need to be observed?  Landlords/managing agents should be speaking to their brokers for guidance on the terms of their policies.  
  • Essential services – do the premises contain a supermarket, pharmacy or health centre which it is in the public interest to keep open? If so can the landlord perhaps keep the centre open on a skeleton basis just for those particular premises?
  • Publicity – how will the closure be perceived by the wider locality and can the landlord communicate its reasons effectively?

In terms of how to protect themselves:

  • Landlords should closely follow and comply with government guidance.
  • They should keep a record of their decision making which can be used to justify this in future, for example checking with Public Health England for its recommendations and keeping copies of information issued to employees and tenants on keeping safe.
  • Open and continuous communications with tenants regarding the landlord’s thinking is likely to be helpful

2. Could landlords face claims from tenants if they close premises voluntarily?

Possibly. If the landlords close the premises, they are potentially at risk of claims for breach of quiet enjoyment or derogation from grant. They would need to show that the closure is permitted. This will depend on analysis of a mixture of the terms of the lease and the factual circumstances.

For example, many leases will contain provisions that oblige the landlord to use “reasonable endeavours in accordance with the principles of good estate management” to provide the services.  The landlord may be able to argue that in these unprecedented circumstances, good estate management requires closure of some or part of the common parts and that it is not “reasonable” to continue to provide the services. Leases will often also contain carve outs of liability for inability to perform the services due to circumstances outside the landlord’s control. This would cover the situation where the landlord has insufficient staff to come in to perform services to keep the premises open

However, on the other hand, tenants who object to closures may well argue that their right to access the premises is a legal right granted by the lease, which is separate from the landlord’s obligation to perform the services. This would mean that the carve outs regarding the obligations to provide services would not provide a defence if a landlord had denied access to the premises.

One would therefore also need to consider the reservations in a lease. Many (if not most) well drafted leases will expressly reserve to the landlord the right to control the common areas or temporarily close these (although in some cases the reasons for such closure may be limited to repair)

In most cases it is likely that tenants will appreciate the difficult decisions facing landlords and dialogue can be established with them about the best way forward.  

Ultimately, it will depend on a case by case analysis of the lease terms alongside the factual circumstances. For example, it may be unreasonable to close premises in a little-affected area, whereas it may be reasonable to do so in badly-affected areas or where the landlord has no staff. 

A further point is that if the tenant will not receive much custom anyway, because their customers are staying away, a tenant may not in any case be able to prove that it has suffered loss of profits as a result of the closure, and closure may in fact improve its position by reducing expenditure on services.

3. Could landlords face claims from keeping premises open?

There is also the flip side – could landlords face claims from keeping premises open? Such claims may come from tenants, employees or from members of the public.

A landlord will owe a duty of care, under the Occupiers Liability Act 1957, to take such care as is reasonable in the circumstances to keep visitors to the common parts of the premises reasonably safe (but this will not apply to areas outside the landlord’s control, such as units demised to tenants).  As noted above, landlords also owe duties to their employees (although the full scope of obligations to employees is outside the scope of this note).

Satisfying this duty will involve adopting sensible precautions such as increased cleaning especially of commonly used surfaces and sending home employees who might have been exposed to the virus.  Landlords might also consider putting notices up warning of coronavirus and advising people to observe social distancing measures to help discharge their duty of care.  

However, it is unlikely that a claim would succeed against a landlord, as a claimant would find it impossible to prove where exactly they caught the coronavirus, and a landlord is likely to be able to argue in its defence that it took reasonable care provided it is observing government guidance.

4. Service charge

The landlord should be able to recover the costs of increased cleaning via the service charge.

Conclusion - Risk planning

Landlords are no doubt well advanced in their contingency planning and should consider whether and when they will close premises, and how they will keep staff, tenants and visitors safe while the premises open, and what they will do if certain staff are unable to come to work or if a case is reported requiring closure for a deep clean.

It is important to be familiar with the landlord’s insurance policy to see if this has any bearing on the landlord’s actions, or if the landlord may be able to claim for any losses or increased expenditure suffered.

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