Business in the new normal? Pandemic-proofing a commercial lease

Business in the new normal? Pandemic-proofing a commercial lease

This period of economic uncertainty has resulted in landlords and tenants examining their leases with an unprecedented scrutiny. Events such as the national lockdown impeded the ability of even the most amenable tenants to comply with usual covenants. The unavailability of services, such as those provided by electricians and removal companies have prevented tenants from adhering to their obligations to repair or, even yield up  premises at the end of a term.

The extent and enforceability of force majeure provisions and the doctrine of frustration have been squirming under the microscope as tenants try to evade contractual obligations which the effects of COVID-19 have made difficult or impractical to sustain. However, as Andrew pointed out in his article, force majeure clauses are rare and frustration is notoriously difficult to enforce in property contracts.

How else can tenants and landlords seek to protect themselves against the uncertainty of future lockdowns and the possibility of a temporary total or partial business premises closure hanging over them? Only recently, Bolton has been plunged back into ‘local’ lockdown as a result of increasing cases.

One option is to try to ‘futureproof’ a lease, by including a clause which provides for the scenario of a lockdown or mitigates against other effects of COVID-19.  The ‘pandemic clause’ would set out the procedure to be followed in the event of a lockdown (or similar measure) providing a degree of certainty for both parties. The ‘pandemic clause’ could:

  • Provide for a rent reduction, holiday or deferment (either of the whole amount or a proportion) during a period of lockdown;
  • Prevent a landlord from taking steps to enforce a tenant’s repair and maintenance obligations which a tenant has been unable to comply with or remedy due to lockdown, until a reasonable period of time after the end of lockdown;
  • Provide for flexibility in the service charge provision to enable the landlord to recover their costs in the event additional and enhanced cleaning and sanitising of the premises is required;
  • Set out the procedure to be followed in the event that the lease term comes to an end during a period of lockdown. This could be dealt with by way of a licence for a specified period of time, rather than a tenant continuing in occupation after the end of the lease term as a tenancy at will, which either party could bring to an end at any time;
  • Provide an exception to a ‘keep open’ clause during a period of lockdown, when legislation prohibits a tenant from legally complying with their obligation to keep their business premises open for certain hours/times;
  • Allow for a delay of the rent review process, so that it commences after a reasonable period of time post-lockdown. Although the valuation date is usually fixed, it is likely to be easier to reflect more optimistically on a valuation once the worst has passed.

However, unprecedented pandemics breed equally unprecedented mitigation measures and legislation, and the ‘pandemic clause’ draftsman would need to have incredible foresight to encompass all possible scenarios. Even the most comprehensive clauses would contain the inevitable chink in the drafting armour of the situation developing into unchartered territory and leaving the careful tenant and landlord in the same position as before.

Agreeing the terms of the ‘pandemic clause’ will be a process of negotiation between the parties. The additional security gained from clarifying the procedure to be followed in the event of a lockdown, and reducing the likelihood of a dispute or the tenant defaulting on payments completely, may mean that a landlord is willing to agree clauses that provide the tenant with more leeway than would otherwise be acceptable. As many landlords and tenants have already demonstrated flexibility and pragmatism during this time, perhaps this collaboration may continue as both parties have a shared interest in pandemic-proofing a lease.