COVID-19: The Impact on the Commercial Lease

In light of increasingly uncertain times due to the COVID-19 pandemic, many landlords may face difficulties in recovering rental payments from their tenants, particularly as more and more commercial tenants are facing disruption to their business, with loss of trade and revenue reported, with potential that businesses may have to close.  It is therefore important for landlords to understand what their legal rights and remedies might be against a tenant for non-payment.  Landlord’s investments in turn will suffer and they will seek to ensure that rent will continue to be paid irrespective of any financial hardship, temporary or otherwise.  However, as the situation continues to effect businesses, tenants may seek to evoke rights under their leases to mitigate their losses stemming from COVID-19 and to part with contractual obligations and suspend rents.

Specific terms agreed between Landlord and Tenant

A lease is a private contract between parties that is individually negotiated.  Typically where a tenant’s business is suffering economic hardship, there is no legal right to suspend rents or to terminate the lease, however options may be discussed and agreed with the landlord, such as the exercise of a contractual break option if this is provided for in the lease.  A Landlord may also consent to an assignment or sub-letting whereby the contractual obligation of the tenant is taken over by a third party.  Amidst the COVID-19 crisis, a tenant may seek to look for a contractual right of relief for the performance of their contractual obligations, in particular paying rent.

Landlords may come under increased pressure to show lenience and understanding to tenants while businesses are facing increased hardship, however failing the enactment of specific legislation altering the obligations between landlord and tenant, the provisions as agreed in the lease remain fully in force.  Any break in rental payments is a matter to be agreed between the landlord and tenant, and where a tenant is failing to pay rent a landlord may seek to take steps to ensure compliance with the terms of the lease.

Force Majeure

Tenants may seek to defend non-compliance of their obligations under the lease based on ‘Force Majeure’ as a result of the COVID-19 outbreak.  A ‘Force Majeure’ event excuses a party for non-compliance with an obligation under the lease on the grounds of a major intervening act.  However, this is not likely to apply as there is no implied right or exception for payment of rent based on ’Force Majeure’ events such as COVID-19.  Further, clauses that deal specifically with how the parties’ obligations are affected by an event that impacts upon one of the party’s ability to perform are uncommon in typical Irish commercial leases, however it will be necessary to check individual lease provisions to see if any such clause exists.

Government direction on trading of non-essential business – an argument of a Frustrating event? 

Tenants may seek to argue that their obligations under the lease have been frustrated in circumstances where newly introduced Government legislation makes it illegal for the tenant in a particular sector to continue trading.  “Frustration” in contract law arises where an unforeseen event makes it virtually impossible for the contract to be performed.  It also provides for scenarios where the position of one party has been substantially changed from an event that was not envisaged at the time the contract was entered into.  In the current situation, a tenant may argue that continuance in trading and observing the obligations under the lease would be in breach of their obligation to comply with statutory obligations, which is often provided for in many commercial leases.  However, the threshold with a successful frustration claim is known to be particularly high and can be hard to prove.  The COVID-19 outbreak is also unlikely to be seen as a frustrating event under contract law given the temporary nature of the event.

Actions a Landlord can take for non-payment of rent

There are a few actions available to a landlord where there is refusal by a tenant to pay rent.  This can be remedied by either forfeiting the lease, the issuing of a winding up petition on the tenant’s company or making a claim in court for financial losses.  A landlord may exercise a right of re-entry or forfeiture under a commercial lease for non-payment of rent, however landlords may run into difficulties in doing so where premises are now closed and enforcement agencies may not be in operation and therefore unable to attend to effect re entry at the request of the landlord.

A landlord may also decide to bring a claim against a tenant for a judgment debt in respect of rental arrears and may also seek repossession of the property.  Importantly, a landlord should not try to take back possession forcibly as this may result in the tenant seeking an injunction in Court, which will not look favorably on a landlord having not followed the proper channels.  A landlord should check the terms of the lease whether it provides for a remedy by way of ‘Forfeiture’, as this will go toward expediting obtaining an order for possession in Court following the issue of an ejectment civil bill.

Striking a balance

It is important for a landlord to protect their position however it is also important to consider that as both landlords and tenants will be affected as a result of COVID-19, it may make the most commercial sense if both parties come to an agreed alternate arrangement for a temporary period of time that is fair for both parties.  This may in fact be financially more beneficial in the long term and may help to preserve goodwill and well-established and otherwise reliable tenants, avoiding empty premises, which may be difficult to re-let in the aftermath of the COVID-19 pandemic.

It may, for example, be feasible for both parties to execute an interim rent concession agreement, with or without the provision of interest, that contains reinstatement dates and a repayment schedule, to cover the period to which a tenant’s business is forced to close or is in trading difficulties.  Both parties may further agree to other measures to protect the landlord’s position, such as profit-sharing methods when the tenant’s business picks up again to help landlords recoup lost rental income.

How we can help

If you have any queries or concerns, or would like to discuss the above in further detail, please feel free to contact Siobhán Whelan in our Real Estate Department on swhelan@bhsm.ie / +353 (0)1 440 8339.

This article is for general information purposes.  Legal advice must be obtained for individual circumstances.  Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.

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