The COVID-19 crisis has changed everything. Our personal lives have been upended and our businesses hit hard.
And with many businesses operating out of leased premises, a great many landlords and tenants are asking themselves what happens if the crisis leaves a tenant unable to pay the agreed rental.
What follows is of necessity a general guide only – professional advice specific to your case is essential here.
Tenants – your risk
As always “With Great Change comes Great Opportunity”, but if you aren’t able to very quickly find and exploit a variable new opportunity you may well struggle to pay your rental.
Don’t stop paying rental! Failing to pay rental on time means breaching your lease, and if you do that you face cancellation, legal action for recovery of outstanding rental, damages claims for breach (substantial if your lease has a long time to run and your landlord struggles to re-let) and calling up of your personal suretyships (exposing you to loss of all your personal assets, house etc).
Bottom line – take professional advice before you just stop paying!
Landlords – your balancing act
As a landlord you have a very delicate balancing act – on the one hand you won’t want to lose even half-reasonable tenants at a time when finding new ones is going to be problematic. One wonders for example how many small businesses will now either fail entirely or be forced to cut costs. And how many others, having had an enforced period of “working from home”, will now be reconsidering the whole concept of leasing separate office space at all.
On the other hand, of course, you need to cover your ongoing costs, which probably means enforcing paying of rent. That in turn means understanding your legal position – for example does your tenant now have an excuse to cancel the lease without penalty? If so, you lose a tenant without recompense. But if your tenant is still bound by the lease, you are free (if you wish – long-term support of your tenant may still be your best option) to demand full payment, then to reduce your losses by cancelling, evicting, executing against the tenant’s assets and calling up personal suretyships.
What about “force majeure” or “impossibility of performance”?
“Force majeure” (a French legal term meaning “superior force”) is an event, either due to “natural causes” (earthquakes, cyclones and so on) or to “human agency” (war, riots, legislation and the like) that makes it impossible to comply with the lease.
We really are sailing into unchartered waters here with worldwide debate over whether or not this pandemic is indeed a case of force majeure. There is bound to be a great deal of litigation before we can be certain whether or not the crisis (particularly the declaration of a national state of disaster and the lockdown period) will be accepted by our courts as a “force majeure” event. If it is, many tenants will argue that their failure to pay rental is not a breach of lease but rather a lease-destroying “supervening impossibility of performance”.
So where do you stand? There are two main scenarios to consider –
1. What does the lease say? The onus of proving a force majeure is on the tenant trying to escape from the lease, and the first thing for both parties to check is what the lease says.Many leases have a clause that deals with a tenant’s inability to occupy premises as a result of damages to or destruction of the premises which won’t apply here, but some leases do have specific force majeure clauses. If yours has such a clause you are bound by whatever it says so check whether a pandemic or government order to cease business might fall under the clause, and if so what results and remedies are specified.
2. What must the tenant prove if there is nothing in the lease? If there is no force majeure clause in your lease, our common law applies. Your problem here is that there are a lot of grey areas involved and every case will be different, so what follows is just a general and non-exhaustive guide.A tenant would have to prove not only that the impossibility caused loss of beneficial occupation (entitling the tenant perhaps to a rebate of rental for the lockdown period, or perhaps frustrating the lease altogether) but in all probability also that it is –
- “Unforeseeable with reasonable foresight”. In this regard we may well hear arguments along the lines of “the emergence of the coronavirus and its impacts were neither unexpected nor improbable”. Could such an argument prevail? Only time will tell.
- “Unavoidable with reasonable care”.
- An absolute as opposed to a probable impossibility. “The mere likelihood that performance will prove impossible is not sufficient to destroy a contract.”
- An absolute not relative impossibility. “If I promise to do something which, in general, can be done, but which I cannot do, I am liable of the contract”.
- Not the fault of either party. “a party who has caused the impossibility cannot take advantage of it and so will be liable on the contract.”
- The “contrary common intention of the parties” could override the defence of impossibility. Consider any representations made by either party to the other that may be relevant.
Moreover our courts have held that “In each case it is necessary to ‘look to the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility invoked by the defendant, to see whether the general rule ought, in the particular circumstances of the case, to be applied.”
That’s all fertile ground for expensive and draining litigation, at a time when neither of you is likely to have an appetite for either.
Which brings us to …
A practical template for negotiation
Take this advice from Roman lawyer and statesman Cicero over two millennia ago: “Agree, for the law is costly”.
So if you are a tenant, rather than just stopping rental payments and then having to fight it out through the legal system, ask your landlord to agree to a win-win compromise that will limit both short-term and long-term damage to your respective businesses.
Draw up a checklist including matters such as –
- Do you or your landlord have any sort of insurance cover for this sort of disaster?
- If you want to cancel the lease entirely, consider whether, if the protections of the Consumer Protection Act are available to you (see below*) it might pay you to give your 20 business days’ notice and pay the “reasonable cancellation penalty” the landlord is entitled to demand. (*You need to take advice on this – leases between “juristic persons” such as companies and trusts in particular are excluded from this particular protection).
- Alternatively, consider what you can offer the landlord to accept your cancellation without a fight.
- If you want to continue in the premises, make sure that your failure to pay on time is specifically recorded as not being a breach of the lease.
- Decide whether you will ask for a full rental holiday, or a rental reduction. For how long? The better a tenant you have been, the more incentive your landlord is going to have to help you stay in place. Offering an extension of the lease – if it ties in with your long-term planning – could help a lot with that.
- If you run into a brick wall there, think of proposing that the arrears not be written off, but rather just be deferred until your business is back up on its feet. Specify when payment of arrears will be made, what if any interest will be charged and so on.
- If the tenant is a corporate entity and you signed a personal suretyship for it, don’t forget to specifically cover that aspect in your agreement.
- Remember to include in your agreement what happens to any deposit the landlord may be holding from you.
- If you agree on a new or amended lease, think of including a professionally-drawn force majeure clause (or check an existing clause for possible update).
Beyond leases – force majeure and contracts generally
Although this article specifically addresses landlords and tenants, the general principles of “force majeure” and “impossibility of performance” apply to all contracts and might in some cases entitle you to delay or avoid contractual obligations beyond lease agreements. Take professional advice specific to your circumstances!
[This article was originally published in the LawDotNews May 2020 newsletter. To view the full May 2020 newsletter please go to this link.]