A Tough Time to be a landlord
A number of our commercial and retail property clients report a flurry of notifications received from tenants, both national and independent tenants, notifying landlords that rental payments at the end of April 2020 will either be significantly reduced or not paid at all due to the forced lockdown announced by Government in order to stop the spread of the Covid19 virus. How should landlords be dealing with these challenges?
Landlords should scrutinise lease agreements for so-called “Force Majeure” clause. Such clauses generally refer to an extraordinary event of “overwhelming force” or sometimes defined as “an act of God”. To be legally considered Force Majeure, the event should not have been foreseen or foreseeable, it must be beyond the reasonable control of one or both of the parties and it should cause one or both parties to be unable to perform its obligations under the agreement. If the event is truly an overwhelming event as defined in the lease agreement, one or both parties can claim protection from having to comply with its contractual obligations without having any effect on the validity of the agreement.
In the event that a lease agreement does not contain a specific “Force Majeure” clause, the parties can possibly rely on the common law right of “supervening impossibility to perform”. The common law requirements for supervening impossibility to perform are that the event must have been unforeseen, unforeseeable and must make performance of one’s obligations under the agreement impossible (not merely cumbersome). Once performance becomes impossible, the duty to perform falls away and any right of the other party to enforce performance of the obligation is consequently also extinguished. Once the overwhelming event stops and performance becomes possible again, the agreement will continue, and the parties’ obligations become enforceable again.
In our opinion the current Covid19 pandemic and Government enforced lockdown will surely qualify as Force Majeure, whether contractually or under the common law, and will provide relief from performance of contractual duties to both parties.
One way in which a landlord can possibly limit losses during this time, is with business interruption insurance cover. We advise landlords to review its business insurance policies and be on the lookout specifically for business interruption insurance cover in circumstances of contagious or infectious diseases at the insured’s premises or in a specified radius from the insured premises. This cover is usually contained as an extension under normal business interruption insurance and has to be specifically selected at the time of application for the insurance. Most business insurance policies require notification to the insurer of a potential claim as soon possible after becoming aware of the potential claim. We advise landlords with business interruption insurance to contact their insurance brokers as soon as possible to ensure compliance with any notification requirements under its policy.