KNOWLEDGE

Coronavirus & Commercial Lease Rent Suspension

Morton Fraser_ David Stewart
Author
David Stewart
Partner
PUBLISHED:
29 April 2020
Audience:
Real Estate
category:
Blog

I have been asked by several commercial landlords whether the standard "rent cessor" clauses in commercial leases mean that tenants will be entitled to suspend payment of rent. The question seems to be driven by a number of articles which have recently appeared floating the idea. In light of that, I thought it would be useful to provide some guidance.

What is the rent suspension (or rent cessor) clause?

Most well drafted commercial leases include a provision entitling the tenant to suspend its rent payment obligation if there is a major insured risk event at the property. The clause is generally designed to protect tenants in circumstances where, for example, the property burns down and cannot be occupied. If that happens, the obligation to pay rent is temporarily suspended, the landlord's loss of rent insurance kicks in (so that investment income is preserved) and the landlord is given a period of time - typically up to 3 years - within which to reinstate the property to make it once again fit for use by the tenant.

How does this apply to Coronavirus?

The specific question I have been asked is whether, as the tenant cannot fully utilise the property due to the government imposed lockdown restrictions, the rent suspension provisions will kick in? There are two parts to the answer:

  • Stage 1: Does the landlord's insurance include pandemic cover, making that an "insured risk"?
  • Stage 2: Is the rent suspension wording sufficiently broadly drafted so as to apply to any insured risk event which prevents the tenant from occupying?

Stage 1 - is it an insured risk?

It has been well trailed in the press that, prior to the outbreak, most commercial insurance policies did not include pandemic cover as standard, but that top-up cover was available. Most people who took out commercial policies appear not to have paid for this additional cover, but it will depend on the terms of your specific policy. Pandemic cover is unlikely to be available for new policies, for obvious reasons.

Many leases will also include an uninsured risk damage exclusion, with associated rent cessor provisions. Where that happens (and again, depending on the specific drafting), it is likely that the tenant will be able to get beyond Stage 1, which will take us on to Stage 2.

Stage 2- Is the lease wording broad enough?

The lawyer's answer is that it will depend on the specific terms of the lease. The practical answer is that the lease is very unlikely to permit suspension of the tenant's obligation to pay rent due to the government shut down. I say this because rent suspension clauses rarely refer to the tenant's ability to occupy "as a result of an insured risk event". It is far more common for the lease to provide that rent is suspended if the tenant cannot occupy "due to damage caused by an insured risk event". 

So, even if pandemic cover is contained within the landlord's policy and is an insured risk (or if the uninsured risk rent cessor wording catches these circumstances), the chances are that the tenant is still obliged to pay the rent because there has been no actual damage to the property.

What about government announcements?

The UK and Scottish Governments have both announced various measures the effect of which is to suspend certain avenues that are open to landlords to seek to enforce lease payment obligations. It is important for tenants to understand, however, that the payment obligations themselves are not suspended or invalid. So, when the government measures are lifted, tenants will find themselves in debt to their landlords for unpaid sums, with interest accruing on those debts.

There has been some talk about the UK government either underwriting those lease debts or amending the law to allow tenants some additional time to pay coronavirus related lease debts, but that remains speculation at this stage and tenants cannot be sure that this will ever happen.

And what about government support?

Since small CBILS loans are now being fully guaranteed by the government, and since CBILS and CLBILS loans are interest free for a period of time, it may be that many businesses will find it less expensive in the long run to take advantage of these government schemes than it would be to rack up "hidden" debt to a landlord who may be harder to appease when the restrictions are lifted. Simply refusing to pay without engaging with the landlord is only kicking the can down the road, running the risk of additional interest and debt recovery charges exacerbating the problem.

Force Majeure & Frustration of Purpose

It's also worth having a look at the comments of my colleague, on the subject of Force Majeure and Frustration of purpose during the Covid-19 crisis. The overall message is that unless they agree otherwise with their landlords (and unless the government steps in to change the law), tenants are likely to remain liable for their contractual lease obligations.

/knowledge-hub/commercial-contracts-hold-firm-currently-given-advice-around-coronavirus

 

Disclaimer

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser LLP accepts no responsibility for the content of any third party website to which this webpage refers.  Morton Fraser LLP is authorised and regulated by the Financial Conduct Authority.