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Impact of COVID-19 on commercial leases in Jersey (as at 30/03/20)

It is clear that recent events are already putting considerable strain on landlords and tenants of commercial premises, in all sectors, resulting in serious legal and practical considerations that are likely to increase over the coming weeks as circumstances continue to unfold.

Landlords and tenants must check their individual leases, as all leases are different, to determine what rights and obligations they have which may impact their business, access to premises and the privacy of customers/ clients, suppliers and employees.

It is not yet known how the courts will react to any action taken by landlords and tenants, so this briefing reflects the ‘usual’ position under commercial leases in Jersey and is provided for information purposes only. It does not constitute legal advice. Before taking any action, a landlord or tenant are strongly advised to seek legal advice.

 

Closing / Restricting Access to Premises
At the time of writing, the Government of Jersey’s guidance requiring the closure of certain business premises in order to comply with strict social distancing measures has been superseded by the imposition of an Island-wide ‘lockdown’, effective from 08:00 on Monday 30th March.

Tenants who are required to or wish to temporarily close their premises during the ‘lockdown’ will be free to do so unless their lease contains a ‘keep-open’ provision but this will not mean that the tenant’s contractual obligations (for example the requirement to pay rent) cease. If the tenant runs a ‘non-essential’ business, our view is that any ‘keep-open’ provision would be ‘trumped’ by the tenant’s obligation to comply with the Government’s recent direction to close. Under the terms of most commercial leases, the tenant has an obligation to comply with all laws, regulations, orders etc. – this includes the Government of Jersey’s ‘stay at home’ restrictions. As things currently stand, a landlord is going to be unable to take action to force the tenant to re-open the premises and the likelihood of a successful claim in damages for breach of a ‘keep open’ provision is low, although there have not been any cases on this subject determined by the Jersey courts yet.

If the landlord has or does decide to close multi-let premises as a precaution, it is advisable for the landlord to document their reasons, communicate their

intention to the tenant(s) and (if time permits) seek legal advice. Landlords could be seen to have a duty of care, particularly in respect of the common parts of a building, so a decision to close as a precaution under current circumstances could be considered reasonable. Depending on the terms of the lease, landlords are usually entitled to restrict or control access to the common parts of a multi-let building by introducing rules or regulations governing their use.

Where premises are closed, it is essential that the landlord takes steps to ensure they are safely secured to avoid vitiating their buildings insurance policy. It is also advisable to notify their insurer, as the premises are likely to be left unattended for a period of time – current Government of Jersey guidance suggests that the Island-wide ‘lockdown’ will last at least until the end of April 2020.

 

Facilities / Common Parts Management
Landlords responsible for the cleaning and maintenance of common parts should be looking to provide more frequent and meticulous cleaning services, as well as additional resources such as hand sanitiser. Whether or not these additional costs are recoverable via the service charge will depend on the terms of the lease. Most leases do contain a ‘sweep-up’ provision entitling the landlord to recover the costs of whatever additional services are deemed reasonable or in the interests of good estate management. It would be hard to argue that additional cleaning and certain forms of maintenance during a pandemic would not fall within this definition!

The question of whether landlords can be required to provide such additional services is more difficult. Leases usually allow landlords a degree of discretion over the services that are provided, so this will depend on the terms of the lease. If there is any doubt, this question is probably best resolved through discussion and any agreement on who is responsible for the additional cost(s) should be formally documented.

 

Rent Suspension
Tenants who are unable to use their premises as a result of quarantining restrictions and/or staff sickness, or as a result of the ‘lockdown’ may approach their landlord to try and secure a rent suspension or rent holiday. However, tenants should note that the Government’s direction to close premises does not change the underlying contractual relationship between them and their landlord; most commercial leases only allow rent to be suspended if the premises are damaged, destroyed or unusable due to an ‘insured risk’.

These provisions rarely, if ever, allow for a suspension or reduction in rent where premises cannot be occupied due to public health or pandemic issues. Therefore, as a matter of law, the tenant will need to continue to pay the rent without deduction or set-off, unless it can agree a concession or variation with the landlord or until such time as the Government of Jersey passes legislation to change the rights of landlords and tenants under commercial leases (see below).

Tenants may be able to look to business interruption insurance to cover losses suffered over this period, depending on the terms of their policy. Other insurances a tenant may wish to check include: general liability insurance; crisis management insurance and mitigation insurance. Indications to-date suggest that COVID-19 (the Pandemic) is not covered in many policies, although each policy should be checked.

Refusing to pay rent would entitle the landlord to take steps to cancel the lease (which involves making an application to the Royal Court). Practically, this may raise the question whether, in the current environment, landlords will spend the time and money on applying to the Royal Court to cancel leases and be left with voids they can’t fill – at least in the short term. Currently, the Royal Court has indicated that it will not be hearing cases on eviction for non-payment of rent as a result of the Pandemic. Whilst the decision to cancel a lease ultimately rests with the Royal Court (and the authorities say that cancellation will only be granted if there has been a “sufficiently serious breach”), simply writing to the landlord with a refusal to pay the rent for the foreseeable future is not recommended.

Speaking with the landlord to discuss potential difficulties should be a tenant’s first port of call. Tenants could ask the landlord:

 

  • for monthly rental payment rather than quarterly;
  • for a suspension on rental payments for a short period. If the landlord objects to a suspension, the tenant could suggest that the ‘missed’ rental payments are spread out over a fixed period (and added to the normal rent) once all has returned to normal;
  • for a reduction in rent;
  • for a rent suspension/holiday in exchange for the cancellation of future right to break; or
  • for their rent to be permanently or temporarily converted to a ‘turnover-only’ basis (many turnover provisions have a base minimum payable, regardless of the tenant’s actual turnover); or
  • for a 3 or 6 month rent suspension with an extension of the lease by a further 3 or 6 months (so the landlord ultimately does collect the lost rent).

Many landlords are commercially minded and willing to discuss measures to help tenants during this difficult period, with a view to preserving the long term rental income from their premises. Landlords could to take this opportunity to offer short term incentives in return for greater future certainty, such as cancelling a future tenant break right, in return for a rent suspension/ holiday.

These concessions may be given by a side letter in the case of paper leases with a term of 9 years or less but will require a variation contract to be passed before the Royal Court if the lease is for a term of more than 9 years. As the number of court sittings has been limited by current circumstances, it is our view (although there has been no specific guidance on this point) that, if the Royal Court took further restrictive measures and stopped passing contracts at the revised time of 12:30pm on a Friday, it would be possible to make an application to the Samedi Court sitting on a Friday afternoon to ‘pass’ a variation contract, given the exceptional circumstances we find ourselves in.

Once the terms of any concession or variation have been agreed, it is important that any side letter or variation contract is properly drafted to ensure the lease itself is not inadvertently varied or any obligations waived. Landlords also need to consider ongoing commitments to any lender, insurer and their superior landlord (if applicable)

 

Upcoming Rent Reviews
Regardless of when the actual rent review is taking place, the key is the date of the rent review (as set out in the lease). Therefore:

  • for fast-approaching rent reviews, it is likely that matters relating to the Pandemic which affect the property in question will be taken into consideration when determining the hypothetical rent.
  • if you are still negotiating the revised rent for a review date that has already passed, the hypothetical rent will be determined based upon what the rent would have been on that review date – so the effects of the Pandemic will not be taken into consideration.

Significantly, this means that a landlord will not be able to postpone an upcoming rent review to take advantage of the provision commonly found in a commercial lease which enables a landlord to ‘activate’ a rent review any time after the relevant review date has passed, in the hope of achieving a better rental once the Pandemic has passed.

 

Terminations of Leases / Breaks
There is no obvious legal route for a commercial lease to be terminated as a result of the Pandemic. The two potential arguments available to a tenant are force majeure or frustration.

Force majeure is available only in the unlikely event that the lease contains a specific provision that is applicable to these circumstances. Most commercial leases will not contain such a provision.

Frustration (a supervening event which either renders a lease impossible to perform, or fundamentally changes the nature of performance) has, so far, not been adopted in Jersey but the Royal Court does have the option to declare a contract voidable where its validity is called into question as a result of a “subsequent event”. There is very little authority confirming this position but it does leave Jersey the ability to develop a framework similar to that of frustration.

Arguments of frustration are notoriously difficult to run, because the threshold that has to be met is so high. There was a recent failed attempt in the UK to end a lease for frustration as a result of BREXIT. Whilst there may have been underlying political reasons for that decision, the courts may not accept that a lease is frustrated by the Pandemic, despite the potential for the Pandemic to become more far-reaching, serious and unpredictable than BREXIT.

If you are a landlord or tenant with an upcoming break option you wish to exercise, it is imperative you read the relevant terms of your lease carefully. Many commercial leases make the right to break contingent on a number of conditions being satisfied and on the correct form of notice and/or method of service being used. There have been numerous attempts to break which have failed, as a result of incorrect service of the break notice or by the tenant failing to give vacant possession of the premises. If in doubt, seek legal advice!

 

Rent Deferral Scheme
We understand that the Government of Jersey is considering the introduction of a rent deferral scheme for business tenants, although no specific details on how this would work have been issued to-date.

As the name suggests, we suspect that this will operate in a similar way to Sections 82 and 83 of the UK Coronavrius Act 2020 which amounts to a 3 month moratorium on a landlord’s ability to take action against a commercial tenant in England or Wales in connection with non- payment of rent. Interestingly, during the moratorium, the landlord’s hands are tied irrespective of when the breach for non-payment of rent occurred. Under the UK scheme, tenants can defer, not avoid, making rental payments; they remain contractually bound to pay any arrears which accrue and landlords will be able to bring claims for any shortfall which remains unpaid at the end of the specified period, 26 March to 30 June 2020 (unless extended).

Early commentary on the Coronavrius Act 2020 suggests the moratorium on the landlord’s ability to take action only relates to actions for non-payment of rent: the landlord can still take action in connection with a non- financial breach of a lease. Although Jersey law does not provide landlords with the ability to forfeit a lease and take back the premises without the intervention of the Royal Court, it will be interesting if such a ‘rent deferment scheme’ is introduced in Jersey, whether or not the moratorium on a landlord’s ability to take steps to cancel a lease will just relate to the non-payment of rent, or to breach of any of the tenant’s covenants.

It remains to be seen whether the Coronavrius Act 2020, or any other type of rent deferment scheme, will actually deliver any significant benefits to commercial tenants who are financially squeezed because of the Pandemic. Although, on the face of it, a rent deferral scheme appears to be a welcome reprieve for tenants, should one be implemented in Jersey, our advice to tenants would be to continue making payments (or part payments) of rent wherever possible. This type of scheme does not give tenants any long-term relief. In fact, it has the potential to store up problems for tenants when they most need protection (when the tenant is attempting to restart its business after the crisis has passed).

 

Construction Issues
Both landlords and tenants may experience issues as a result of the impact of the Pandemic on development programmes.

Landlords may need to consider the effect of delays on development milestones in agreements to lease (which may trigger a liquidated damages clause) and the risk of a disconnect between the landlord’s potential liability to the tenant and what the landlord is able to recover under the terms of their building contract.

 

Top Tips for Landlords and Tenants
We do hope that the health risks and disruption caused by the Pandemic are kept to a minimum, but, where there are issues, these are our top tips:

  1. Keep evidence of the current Government of Jersey guidance at the time you are making any decisions relating to the Pandemic, and notes of your own thought process;
  2. Retain all emails and other correspondence you have with the other parties to the lease, including attempts to seek agreement to specific courses of action (and, in the event you do reach an agreement, make sure that it is in writing!);
  3. Document any written advice you receive from health and safety professionals or others;
  4. Review insurance policy terms and seek advice from insurer(s); and
  5. Tenants should investigate the measures being introduced by the Government of Jersey to assist local businesses to minimise the effects of the Pandemic.

For further advice on this please contact the BCR Law Commercial Property Team.

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