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 viable new opportunity you may well struggle to pay your rental.
Don’t just 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 payment 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 uncharted 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 –
Many leases have a clause that deals with a tenant’s inability to occupy premises as a result of damage 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.
A tenant would have to prove not only that the impossibility caused a 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 –
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 –
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 is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)