How Will The Coronavirus Affect Comercial Retail Leases?

Posted by Mario DeAlmeida, Director, on Apr 1, 2020 11:00:34 PM

In commercial real estate, corornavirus

This is a guest post by Mario DeAlmeida, Director,

Landlords and tenants are having to carefully examine the small print of their commercial leases to understand the full impact of the coronavirus outbreak.

It's fair to say that right now, the current state is one of uncertainty. With many leases using boilerplate language, there's little if any mention of a landlord's or tenant's obligations in the event of such an unprecedented crisis as the spread of COVID-19.

However, below we deal with provisions present in most lease agreements that could be relevant to the situation many landlords and tenants currently face:

Force Majeure

Also, sometimes referred to as vis major, it means superior force and deals with chance occurrences or unavoidable accidents. 

In relation to commercial leases, it allows for the temporary suspension of specified tenant or landlord obligations due to unforeseen circumstances that are beyond the control of either party.

It's clear that force majeure is relevant in the current situation. And both landlords and tenants will be looking to its provisions in their leases for protection if they are unable to fulfill certain obligations. 

For example, a landlord may be unable to carry out scheduled property improvements due to the unavailability of tradespeople, and/or the requirements of social distancing. Similarly, a tenant may be unable to continuously operate their business from the leased premises due to enforced closure.

Few leases extend the provisions of force majeure to solely include financial obligations, such as a tenant's requirement to pay rent on time. Still, it's worth remembering that the wording of commercial lease forms can differ. 

Below is a list of common clauses that force majeure can offer protection from, some of which could clearly be said to be relevant to the coronavirus outbreak:

  • Unavailability of utilities at the premises
  • Actions carried out by governments
  • Acts of God - including floods, hurricanes, and tornadoes
  • Riots
  • Industrial action by workforces
  • Embargos preventing the delivery of goods or services
  • War

You will note the lack of any specific reference to pandemics. Although this is certain to feature on all leases drafted post the coronavirus outbreak, those created pre-December 2019 are unlikely to mention it. 

However, unless an agreement specifically restricts the categories of events that force majeure can relate to, claims should still be possible using force majeure in the light of problems caused by COVID-19.

But how will coronavirus affect tenants and landlords as regards other aspects of their lease? We'll deal with the most common scenarios below:

Abandonment or Vacation of a Leased Space

The terms of a lease are likely to require the tenant to continuously operate their business from the premises—particularly those in the retail sector. 

Failure to do so is termed a default. However, with many businesses being forced to close through no fault of their own, landlords should consider showing flexibility in these exceptional times.

Changes To Opening Hours

Commercial leases for retail outlets often state that tenants must be open for business and fully staffed during retail business hours. 

With many staff self-isolating and unable to travel, let alone work, many retailers are operating reduced hours or, even more likely, not opening at all. Again, landlords should demonstrate an understanding of their tenant's situation.

Cessation Of Business

Despite planned government intervention via a financial stimulus package, the coronavirus will likely cause many businesses to cease trading altogether. 

This will, of course, result in a permanent change to the terms of the lease, which could negatively impact the landlord's property.

Changes To Workspace

Social distancing and other measures designed to slow the spread of the coronavirus could result in tenants seeking ways to reduce the density of the spaces in which they work, and people gather. 

Most leases are unlikely to require the consent of the landlord for tenants to carry out such alterations. As long as the changes are carried out 'in good faith,' it's difficult to see how landlords can take issue with such measures.

Breakrooms, Canteens, Gyms, Play Areas, Food Courts

All areas that are usually used by multiple people, often in close proximity, will now be affected by social distancing initiatives. 

Landlords will be considering the temporary closure of such spaces or, at the very least, restricting their usage. And some lease agreements allow landlords to impose controls on common areas

However, there will be agreements that give tenants more of a say over what happens within those areas.

What should landlords and tenants be doing right now to mitigate the impact of the coronavirus on leases?

Both parties must keep channels of communication open during the pandemic. Both should work together to reduce the impact the COVID-19 outbreak has on business.

Now is not the time for landlords or tenants to try and gain the upper hand. The coronavirus is currently impacting everyone in a way that few could have anticipated even just a few weeks ago. 

Any doubts over the terms of a lease should be discussed, with tenants and landlords communicating in good faith. That will enable business to get back to normal more speedily once the worst effects of the virus have been contained.