The outbreak of COVID-19 across the globe has resulted not only in a healthcare pandemic but a largescale detrimental effect on the Irish economy and our country’s businesses.
At present, the Irish Government has closed all pubs until 29 March, and has advised that people should work from home where possible. Most commercial tenants are facing disruption to their business, impact on supply chain, loss of trade and potentially having to close. In turn, Landlords’ investments will suffer if rents are not being paid and capital values fall. During these unprecedented times, both Landlords and Tenants must work together to weather the storm ahead in a manner which strikes a fair balance for both parties. Communication between the parties will be key, with co-operation making the most commercial sense.
If Tenants are unable to use their premises because of COVID-19 they should check with their insurer as to whether such a situation is covered under their business interruption insurance policy. A close review of the insurance policy will help here. If rents are covered under the policy, Tenants should put in place appropriate security arrangements for the premises during the period it is unoccupied/ closed. Tenants should notify their Landlords prior to any closures/ periods of inoccupation so that Landlords can notify their own insurers (and lenders where appropriate) also.
The more difficult position arises where Tenants are not covered under a policy of insurance as commercial leases typically do not contain force majeure provisions or allow for a suspension of rent in this type of scenario (rent suspension clauses usually apply where the premises has been damaged or destroyed by an insured risk i.e. fire or flood). Any refusal by a Tenant to pay rent may result in the Landlord either forfeiting the lease, issuing a petition to wind up the Tenant company or making a claim to the Courts for financial losses. With such dire consequences arising for Tenants, a blanket refusal to pay rent is not recommended. Engagement with Landlords is key. Avoiding the issue and waiting for a legal claim to land is not a good strategy.
Taking things sector-specific, most retail commercial leases will also contain “Keep Open” clauses meaning that a retail Tenant’s unilateral decision to close the premises would result in it breaching its obligations under the lease in relation to trade and keeping the premises open, stocked, staffed during specific hours etc. If this situation arises, Tenants may seek to negotiate temporary rent abatements with their Landlords or for rent to be temporarily converted to a turn-over basis instead. A Tenant will not be able to terminate their lease as a direct result of COVID-19.
If Tenants seek rent relief, some Landlords may agree to enter into short-term arrangements that provide partial base rent abatement, with or without interest, and that contain defined reinstatement dates and a repayment schedule. Landlords may also insist on including provisions, particularly in retail leases, that allow Landlords to recoup some lost rental income when the economy grows stronger again — this can be calculated by means of a percentage rent exercise or other profit-sharing methods.
Separately, Landlords should ensure that any workouts with Tenants satisfy the requirements of the loans which affect their investments so as to avoid unanticipated events of default. For example, often there will be debt-to-income ratios and other covenants that require a certain amount of rental revenue on a monthly or annual basis. Landlords should communicate openly and early with their lenders in relation to these matters.
Both Landlords and Tenants will be drastically affected COVID-19 one way or another, but a Landlord’s willingness to at least evaluate alternative arrangements may be beneficial financially in the long term and create goodwill in the process. In doing so; however, Landlords must consider their own obligations, particularly to their lenders, and the effect that lease modifications may have on their loan covenants. All parties should work together constructively and court actions or forfeitures (with consequent injunctions) should be an absolute last resort.
We have extensive experience of working with both Landlords and Tenants to advise on the practical application of lease obligations and covenants. We are available to discuss any issues that may arise for you as a result of your evolving obligations as a Landlord and/or Tenant during this time of uncertainty.
For further information, please contact Sarah Keenan
PH: 00353 1 639 3000