Issues facing landlords: COVID-19

In these uncertain times, many of our clients are looking for answers, insights and solutions to the issues raised by COVID-19.

As businesses prepare for a range of scenarios, including those mandated by Government directives, we considered tenant issues in our previous blog (including lease termination and non-payment of rent).

We now consider other COVID-19 issues facing landlords.

Do I have to keep my building / shopping centre open for tenants?

Answer: Yes

Compliance with law: Unless the Government mandates closure, you are likely to be required to keep your building open for tenants. If you shut the building on your own accord, there could be issues related to breach of the quiet enjoyment covenant.

Occupational safety: In continuing building operations, landlords who are employers should consider their duty of care to their staff and others (including visitors) to the extent they control parts of premises (eg common areas). Appropriate hygiene policies should be implemented to mitigate the risk of breaching those duties of care.

Will I need to pay compensation to retail tenants if the building / shopping centre is required to close due to COVID-19?

Answer: It depends

Business disturbance: Retail leasing legislation typically includes provisions requiring compensation to be paid to tenants, particularly where the tenant’s access has been substantially inhibited.

Exception for emergency: Most retail leasing legislation however, provides an exception where the landlord is not required to compensate the tenant if the landlord action (ie closing the building) was a reasonable response to an emergency or to comply with a requirement of a relevant authority or law. There are certainly arguments to be made as to whether a global pandemic falls into the definition of an ‘emergency’. Nevertheless, it is clear that where a building / shopping centre is required by a public authority to close, the exception would apply.

Can I force my tenants to keep premises open?

Answer: No

Voluntary closure: If the lease includes an obligation on the tenant to keep the premises open or to actively trade from the premises, a tenant’s decision to voluntarily close its premises due to the spread of COVID-19 may breach this obligation. It is unlikely a court would enforce such a clause (unless in exceptional circumstances), although the landlord may still have a claim for damages.

Government mandated closure: This obligation cannot be enforced where a tenant closes its premises due to a Government directive. This is because leases will most likely also contain a provision requiring a tenant to comply with laws and Government directives. This would likely trump any other conflicting tenant obligation.

Can I close off certain common areas?

Answer: Yes, as long as it is reasonable

Common areas: Most leases will provide that common areas remain under the absolute control of the landlord and give the landlord the right to close off any common area it reasonably considers appropriate to do so. In current circumstances, this may include closing off certain common areas in order to protect tenants and the public due to COVID-19. A court would unlikely deem such actions to be unreasonable. However, this would be fact specific and landlords should still consider whether the extent or duration of closure unreasonably inconveniences the tenant or materially disrupts the tenant’s business operations.

Can I recover the costs of additional cleaning of the premises?

Answer: Yes

Recovery of outgoings: Leases often require tenants to reimburse landlords for the costs for cleaning the premises. The standard and frequency of cleaning is not usually stipulated in the lease. Therefore, if a landlord considers that additional cleaning is required due to COVID-19, it may increase the standard and/or frequency of cleaning and recover those costs from the tenant as part of outgoings. A tenant may not usually dispute these charges unless the additional cost of doing so is unreasonable.

Review your leases and discuss with your tenants

The above information is provided on a general basis only. Now more than ever, the specific terms of each lease are critical and should be carefully reviewed by landlords. You should also be aware of the rights tenants have in these circumstances, which we summarised in our recent blog.

Businesses of all sizes (including landlords and tenants) are facing unprecedented uncertainty in light of the outbreak of COVID-19. Bespoke is actively advising clients in relation to the COVID-19 outbreak. Please get in touch if you would like us to provide advice on any of these issues.