The property market has undergone a seismic shift as a result of the COVID-19 pandemic. Commercial leases in the leisure sector have changed forevermore and landlord and tenant relationships have either become closer and collaborative, or more fractured than ever.
One of the principal changes within commercial leases is the inclusion of a Pandemic clause, also known as a Force Majeure clause. Such clauses are intended to help manage landlord and tenant relationships when something unavoidable happens that materially affects the tenant’s ability to trade as we’ve seen recently.
A pandemic clause is such a new phenomenon so where do you start? What do you agree? What should parties consider before agreeing to a new clause?
Below I’ve answered some common questions for both landlords and tenants to consider when agreeing to such clause, along with some personal tips from my experience advising on new leases for restaurants, gyms, night clubs and immersive experience venues.
As part of the pandemic clause, what is the rent concession?
The exact concessions will come down to a negotiation between the parties, but it could cover the entire rent payable for the period of the closure, or a percentage of the rent. It could also be staggered, it’s up to the landlord and the tenant to decide what works for both sides.
Is the pandemic clause capped to certain timeframes?
I’ve witnessed leases in which the clause applies to the entire rent from the start of the forced closure, however I’ve also been involved in leases when the clause only applies for a three or six months period in any 12 months on a cumulative basis. Again, the period of time applied will come down to negotiations between both parties.
Does the pandemic clause cover other lease clauses apart from rent?
From my experience, pandemic clauses usually only cover the rent, and not other lease liabilities such as the service charge and repairing covenant in order to safeguard the ongoing maintenance and repair of the property.
When does the pandemic clause not apply?
If the tenant can operate from the premises to some degree - such as providing takeaway services or deliveries in the case of a restaurant - then typically the clause will not apply. This should be worded carefully to avoid ambiguity.
What happens when the pandemic clause comes into effect during a rent free period?
In this instance the rent free period should be suspended and extended by the number of days the business was forced to close once restrictions are eased.
Does the pandemic clause cover only COVID-19 or all potential infectious diseases?
The clause should be specific to when it applies. I would advise the parties agree that all infectious diseases are covered by the clause as unfortunately there is a high probability there will be diseases in the future that will result in forced restrictions.
What happens when renewing a lease that did not include a pandemic clause?
Under the Landlord & Tenant Act 1954, where there is no pandemic clause in the existing lease, then there will be a burden of proof for the party that seeks to amend the lease by its inclusion. I strongly recommend when renewing a lease, as with a new lease, that a pandemic clause is included. My view is supported by a recent county court judgement (WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellshaft MPH) where the presiding judge Richard Parkes QC ruled that “essential fairness demands” the inclusion of such a pandemic clause. However, an even more recent county court judgement (Poundland Limited v Toplain Limited) ruled that pandemic clauses are unfair variations to existing business leases, citing that it is not a fair and reasonable variation to the terms of an existing business lease.
This above list is not exhaustive but should help provide both landlords and tenant things to consider when drafting pandemic clauses. Such clauses should of course be bespoke to the parties involved and there is no one size fits all approach. At its core the clause should be about providing a mechanism to avoid disputes and to lessen the strain on landlord and tenant relationships during unprecedented times.
About the author:
Abban Magos is a senior surveyor in the Licensed & Leisure team and for the past four years has been advising landlords and tenants on leasing and acquiring leisure properties as well as providing specialist advice on leases. Abban’s clients range from individual to institutional landlords and tenants who are looking for their very first commercial property or are an established brand.
To contact Abban email, Abban.Magos@colliers.com