COVID-19: Considerations for Business Tenancies
The Covid-19 pandemic has many business owners concerned about the continuity and prosperity of their business. Various schemes have already been implemented by the government to reduce the negative effects of this pandemic such as the Small Business Grant Fund, rates holidays and the Job Retention Scheme. This article will explore issues which may arise for occupiers of commercial properties in the context of business interruption or closure due to the epidemic.
Before closing their business premises a tenant should check their lease. This is because some commercial leases have a ‘keep-open’ clause which essentially places an obligation on the tenant to keep trading throughout the duration of their lease. These clausesaim to protect the landlords’ rental income for the duration of the lease.
Tenants are unlikely to be in the position to terminate their lease on the basis of force majeur or frustration if their landlord closes a multi-let property as a result of government advice. However, this will ultimately depend on the terms of the lease and the surrounding circumstances. If the lease contains tenant break options on pre-defined dates the conditionality of these clauses should be carefully reviewed. Such options, and imminent expiry of leases, also provide an opportunity for the tenant to negotiate the terms of the existing lease or procure concessions from the Landlord.
Payment of Rent and Service Charge
Most commercial leases will not allow the tenant to withhold rent or service charge except in specific and defined circumstances, usually in the case of damage or destruction of the premises by an insured or uninsured risk (defined in the lease) or when the premises are inaccessible. It is unlikely that circumstances caused by Covid-19 will fall within this definition, and tenants must be wary that withholding rent and/or service charge without prior agreement with the landlord could result in forfeiture by the landlord, among other contractual remedies for breaching the terms of the lease. It is therefore important that occupiers maintain communication with the landlord, as it may be possible to agree concessions, rent reduction or other cash flow measures such as moving from quarterly to monthly rent payments.
Business Interruption Insurance
An additional step to ensure the long-term security of your business is to carefully review your business interruption insurance policy. Business interruption insurance is purchased as a method of protecting the business in the event that it sustains some sort of physical damage which prevents it from trading. These policies can go beyond what general buildings and contents policies will cover and can include cover for consequential losses such as loss of revenue, rental income and additional staff costs. These policies are usually designed to cover natural catastrophes such as fire and flooding. However, some policies will extend to cover pandemics. When looking at your policy, it is essential that you pay close attention to the following:
Does your policy include cover for notifiable diseases?
The government officially named Covid-19 as a ‘notifiable disease’ on 5thMarch 2020 and most business interruption policies will include cover for notifiable diseases. What is important to look at here is whether your policy specifically states which notifiable diseases are covered. Your policy may contain a specified list of diseases. If this is the case, it is unlikely that Covid-19 will be covered as it would not have existed at the time the policy was written. If there is not a specific list of diseases included in your policy, you may be covered against losses arising as a result of the current pandemic.
Does your policy include cover for loss resulting from the action of a competent authority?
If there is a list of specific diseases, check whether your policy includes cover for interruption of the business as a result of the actions of a competent authority in the vicinity of your premises. What is classed as a competent authority will usually be defined in your policy. Your policy may also include insurance cover for your business where the competent authority has prevented access to the premises. If you are concerned about the long-term security of your business, it is essential that you take a look at your business interruption insurance policy. Should your policy not cover losses due to the coronavirus, the government also offers the Coronavirus Business Interruption Loan Scheme (CBILS) which may be a worthwhile avenue to explore. The CBILS is available to small and medium sized businesses with an annual turnover of up to £45 million and provides access to loans, invoice and asset finance and overdrafts of up to £5 million.
Protection Afforded by the Coronavirus Act 2020
Legislation has now been passed into law preventing re-entry or forfeiture by the landlord for non-payment of rent during the period ending on 30 June 2020 (or such period as extended by government). It is important to note that at present the legislation will only delay the landlord’s right of re-entry or forfeiture and does not affect the ability of landlords to exercise such right at the end of this period. It should also be noted that this protection applies only to a tenancy to which the Business Tenancies (Northern Ireland) Order 1996 applies. Consideration should be given to whether these measures will apply to the occupational arrangements in each case.