England and Wales

Updated on 12.05.2020.

1. Is a lessee eligible for rent reduction due to a significant decline in footfall and consequently its turnover as a result of COVID-19?

If the rent, or at least part of it, is based on turnover (which is often the case with retail leases) then the lessee will in any event pay less rent. However, in respect of any base rent (not connected to turnover), there is unlikely to be a right for the lessee to seek a reduction under the terms of its lease. There is nothing in UK law (outside of the terms of the lease) that would give the lessee this right. 

In the event that a lessee fails to pay rent there is now a moratorium on the forfeiture of commercial leases. This means that lessors cannot currently forfeit commercial leases until at least after 30 June 2020. This date may be extended.

In addition, on 23 April 2020,  the Government announced a suspension of the ability for landlords to use statutory demands and winding up orders if a tenant cannot pay its rent due to Covid-19. This measure is initially intended to be in force until 30 June 2020, but can be extended in line with the moratorium on commercial lease forfeiture. Legislation has also been announced to prevent landlords using commercial rent arrears recovery (CRAR) unless 90 days or more of unpaid rent is owed.

2. Is a lessee eligible to temporarily close its leased space - on its own initiative – and opt for rent reduction as a result of COVID-19?

Not unless the terms of the lease expressly provide for this. It is very unlikely that a typical UK lease would allow for this. Most retail leases will contain a “keep open” obligation on the lessee requiring it to continue to trade. There will be exceptions to this so each lease would need to be checked to ascertain if the exceptions covered the COVID-19 situation, but it may be unlikely that they would. In any event, it is highly unlikely that the lease would allow for a rent suspension in this scenario.

3. Is a lessee eligible for rent reduction in the event its leased space is closed following an order by the Government as a result of COVID-19?

This will depend on the terms of the lease but may be unlikely in a typical UK lease. There is nothing under UK law currently providing for a rent reduction in this scenario. A lessee’s insurance may respond to business interruption (and the obligation to pay rent) but this will depend on the terms of the insurance policy. 

4. What kind of security is generally provided by a lessee in connection with a lease, a bank guarantee, a deposit or otherwise?

Rent deposits and parent company guarantees are common in the UK. Bank guarantees are also used but are less common. A former lessee of the lease (i.e. who has assigned the lease to another lessee) may also have provided a guarantee on the current lessee’s obligations (known as an “authorised guarantee agreement”).

5. Are there any guidelines/ agreements applicable to retail properties?

The UK government has released (11 May 2020) this guidance as to its phased plan for easing lock down. This guidance includes reference to retail properties (see for example pages 25 and 31). In addition, REVO (a UK industry representative body for retail property owners and occupiers) has recently released this guidance for re-opening retail premises.

It currently appears unlikely that a lessee could use COVID-19 as a means to terminate its lease. However, the position is moving rapidly, and this may change. Lessees should consider engaging with their lessors to attempt to work together to find a solution during this period.

7. Does the outbreak of COVID-19 justifies invoking force majeure by lessee?

Force majeure is not a principle that can be applied unless it is expressly provided for in the lease. It is very uncommon for modern leases to include a force majeure provision. For any leases that do include a force majeure provision, the specific wording would need to be analysed as it may be that force majeure is defined by reference to a single event. As the pandemic is an ongoing event, it is possible therefore that any specific force majeure wording may not respond.

Ciaran Carvalho
Ciaran Carvalho
Partner
London
Marie Scott
Marie Scott
Partner
London