It still feels very fresh in our minds; Government restrictions to prevent the spread of Covid-19 resulted in many commercial tenants being unable to use their premises but remained liable to pay rent.
The situations created weren’t catered for in their lease agreements. Given the continued uncertainty surrounding the pandemic and any potential future lockdown events, ‘pandemic clauses’ are increasingly being negotiated into new leases and lease renewals.
Here, we explain the use of pandemic clauses in lease agreements and share tips for commercial tenants and landlords who may consider adding such clauses to their new leases. And remember, if you have any questions regarding pandemic clauses, please do not hesitate to contact our commercial property solicitors for further guidance.
Considerations for commercial tenants and landlords
What are pandemic clauses?
These clauses are designed to take effect during any restrictions preventing the tenant from trading at the premises. They are also known as force majeure clauses which are an agreement between contracting parties that their contract may be varied or suspended in specified exceptional circumstances.
Specific pandemic clauses might include:
- rent suspension provisions which apply when properties become unusable due to a particular restricting situation. Whilst they usually relate to damage by insured risks, in the context of a ‘pandemic clause’ a rent suspension clause delays, suspends, or reduces rental payments if a restrictive measure is introduced (for example, a national lockdown)
- suspension of other requirements such as repair obligations or the payment of service charges during lockdown
- the payment of rent to be payable in arrears rather than in advance
- the tenant being relieved of its obligations to comply with the insurer’s requirements
- that the landlord shall be prevented from forfeiting the lease
- termination in the event of continued delay or non-performance of the contract.
The scope and effect of pandemic clauses will depend on the words used, as interpreted in the context of the contract as a whole and the specific facts of each case.
Boilerplate or bespoke?
Such clauses should be bespoke to the parties involved as there is no one size fits all approach. The clause should aim to provide a mechanism to avoid disputes and to lessen the strain on landlord and tenant relationships during unprecedented times. They often involve risk sharing between the parties.
Whether the parties agree to include pandemic clauses (and on what terms) will depend on the particular circumstances of the transaction (for example, the length of term, the type of premises and (where relevant) the landlord's retained property, the proposed use and the relative bargaining strength of the parties.
When should you negotiate pandemic clauses?
The parties should negotiate pandemic clauses at the heads of terms stage. It can cause delays and issues if trying to introduce these at the drafting stage, especially given that such clauses are more recently being incorporated in to leases and there is no standard industry wording at this stage. If only introducing them at the drafting stage they are more likely to be watered down through negotiations, and the parties may not get the protection they seek.
Some landlords are prepared to negotiate pandemic clauses, but some may feel that they do not have the flexibility to accept rent reductions in such circumstances. Landlords might argue that tenants may be sufficiently protected by the steps taken by the Government.
Key tips for landlords and tenants
Serious consideration should be given when negotiating to add pandemic clauses into your commercial lease and the precise terms of those clauses. The clauses should be worded carefully to avoid ambiguity and capture the parties’ intentions. It is also recommended that all infectious diseases are covered by the clause as there may be other diseases in the future that will result in forced restrictions.
It is a matter for the parties to negotiate the exact terms. In the context of rent suspension clauses, the following will need to be considered:
- the amount of rent - will it cover the entire period or a percentage for that period
- the timeframes – will rent be suspended for the entire forced closure period or only for a certain period such as the first 3 months.
It is common for the clauses to specify the impact that the circumstances in question must have before the clause can be triggered. For example, reference to the event or circumstances having "prevented", "hindered" or "delayed" performance require different levels of impact on performance before a party might avoid liability.
If the tenant can operate from the premises to some degree, such as providing takeaway services or deliveries in the case of a restaurant, then a rent suspension clause is not likely to be triggered. A tenant should explore alternative means of performing, reducing delay, or minimising any loss to the landlord. This may require considering alternative suppliers, or alternative methods of delivery, even if this is at a higher cost.
If a landlord does not want to provide a rent suspension but does want to assist a tenant in difficult times, the landlord may prefer for the rent to be either deferred to a later date or reduced by way of a one-off rent concession (so that the landlord and tenant effectively share the commercial risk between them). Landlords may also consider allowing a change in the frequency of rent payments to help tenants with cashflow.
Landlords may be more reluctant to consider the suspension of other clauses such as service charges and repair obligations, to safeguard the condition of the property. Landlords in sectors that have seen an increased demand, such as warehousing and storage, might consider themselves to be in a stronger position to resist such clauses.
Parties seeking to rely on a pandemic clause should carefully consider the precise wording of the relevant clause, the contract as a whole and the circumstances that have arisen. If they consider the clause can be triggered, the party seeking to rely on the clause should serve any notices as required under the contract, as soon as possible and in accordance with the notice provisions.
What about lease renewals?
For lease renewals, if the introduction of a new term is ultimately not agreed between the parties, then the matter will usually be determined by the court. A court would have regard to the terms of the current tenancy and all relevant circumstances. The burden of persuading the court to allow new clauses will fall on the party seeking to add them, and it must be fair and reasonable in all the circumstances. Recent case law suggests that for the moment, the courts may not agree to insert pandemic clauses at renewal unless they are already in the existing lease or that the parties had already agreed to such a clause being inserted.
