Coronavirus – An Unwelcome Visitor to the High Street
Key contact: Damien Cann
Author: Cerith Bevan
Businesses operating in the retail sector have temporarily lost their high street presence following the Government’s announcement on Monday 23 March 2020 that all but essential business should remain closed until further notice. Landlords will also feel the pinch as they see a fall in demand from new tenants waiting for the wave to pass and requests for rent holidays from existing tenants.
Can tenants just walk away?
Probably not. Retail tenants may seek to argue that their lease has become frustrated due to the outbreak of COVID-19 being an event which renders it commercially or physically impossible to fulfil the lease obligations. However, courts impose a very high bar when dealing with the argument for frustration of a lease and would be unlikely accept that the effect of the COVID-19 outbreak amounts to frustration. We saw in 2019 how the courts rejected the European Medicines Agency’s argument that Brexit had caused their lease to become frustrated.
What about rent?
Leases require the premises to have suffered damage for rent to be suspended which is not an effect of COVID-19. On 23 March 2020 the Government ordered a moratorium for at least three months on lease forfeiture for occupiers, meaning that landlords will not be able to exercise any right of forfeiture on tenants unable to pay rent. This provides struggling retailers with some breathing space during these difficult times with most required to make a quarterly rent payment on 25 March. Kate Nicholls, Chief Executive of UK Hospitality has said ‘whilst this removes the immediate cashflow pressure of quarter rent day, the Government has made clear that the negotiation is now with the lessee and landlord to reach a solution on payment.’
Retailers may also seek to engage in a Company Voluntary Arrangement (CVA) to reduce its rental liability under leases. We have already seen the use of CVAs amongst retailers which has caused some unrest among landlords (primarily due to the lack of say they have in the process). In particular, the high court decided in 2019 that implementation of a CVA (and the resultant reduction in rent being paid by the tenant) does not trigger a ground for forfeiture in leases. This decision inevitably means landlords’ hands are tied when it comes to its forfeiture rights when a CVA is engaged.
From a practical perspective, many landlords are receptive to the idea of agreeing a deferral or rent-free period during this period of uncertainty – the rationale being that it’s better to help keep a tenant afloat by agreeing a lower rent than contributing to its demise by enforcing a rent which it cannot pay.
Both landlords and tenants should check their business interruption policies. Whilst most of these types of policies relate to interruption following property damage, there are policies which cover the event of disruption as a result of a ‘notifiable disease’ – the Government have already declared COVID-19 as a notifiable disease. In terms of retail tenants, this type of insurance can cover lost profits, fixed costs (such as rents) and increased costs of working.
Preventative measures and associated costs – who pays?
In trying to contain the virus, landlords may look to carry out frequent deep cleaning of common parts – this may even become a legal requirement in time. The likelihood is that the tenant will bear these additional costs by paying a higher service charge pursuant to the provisions in the lease. The extent to which the landlord can recover these via service charge will likely depend on whether the costs are reasonably and properly incurred and in line with the principles of good estate management.
Survival of the fittest
As we have already seen during our series of articles on the future of the high street, the retail market is in a huge period of transition resulting in the decline of traditional high street. Even the strongest remaining businesses will require substantial and continued support from Government to pass this unprecedented test.
We are here to help
Whether you are a landlord or a tenant, we can assist your business in dealing with these testing times. Please get in touch with us if you would like us to offer advice or enter into negotiations with landlords or tenants on your behalf.
For more information on any of the points raised, please contact Damien Cann or our real estate team.