A legal issue receiving almost constant attention since the lockdown commenced is the liability of commercial tenants for rental of their business premises during the Lockdown (including the more relaxed Alert Levels). There are many factors which have affected our advice, namely the terms of the lease agreement, as well as the nature and operation of the business of the tenant, which are all material. The legal principles of impossibility of performance has already been discussed by our legal team (have a look at one of our articles on the subject); this article will focus solely on commercial lease agreements.
Every contract can be broken down into constituent obligations, performances and counter-performances. In the case of a lease agreement, the essential obligations of the landlord are to provide access to and undisturbed use and enjoyment (often referred to as commodus usus) of the leased premises. In turn, the tenant’s reciprocal obligation is to pay rental.
The Regulations governing the movement of persons and prohibiting non-essential business services (as defined in the Regulations) had the effect of preventing businesses from trading from their leased premises. The prohibitions were imposed by acts of State, rather than any fault on the part of the landlord or tenant, and therefore, the principles of impossibility of performance are applicable.
Essential and non-essential businesses under Alert Level 5
During Alert Level 5 Regulations, most landlords were unable to provide their non-essential service (as defined in the Regulations) tenants access to and use of their premises. In other words, they were unable to fulfil their obligations under the lease agreement and the tenant was unable to use the premises for the purpose for which they were let. It is important to pause and emphasise that tenants conducting essential services (as defined in the Regulations) were able to trade from their business premises during this period, and therefore, landlords were able to fulfil their obligations to these tenants. Therefore, essential service tenants cannot rely on the principles of supervening impossibility to avoid paying rental.
What about Alert Level 4, 3 and further easing of restrictions?
Some of our clients have questioned whether they, under the more relaxed Alert Levels which permit the operation of their specific business from their leased premises, are still liable for rental if they have allowed their staff to work from home and are not using the premises.
In this instance, the law no longer prohibits the landlord from performing his duties to provide these tenants access to and use of the leased premises. The tenant’s lack of use of the premises is in fact a choice and thus not prohibited by law. Consequently, the landlord, able to fulfil his obligations, is entitled to demand counter-performance, in the form of payment, from his tenants. Other considerations, for example, whether the tenant is entitled to a reduction in rental due to the restrictions as to the number of employees allowed to trade would be dependent on the facts and the terms of the lease agreement, and thus, would need to be decided on a case-by-case basis.
Adapting and changing your trade
Another interesting question which arose has been whether a tenant, who normally conducts a non-essential service but perhaps adapted its business model to start providing an essential service or permitted trade during the Alert Level 5 and 4, is liable for rental. Was there perhaps an obligation on those tenants to change their business trade to provide services which are were permitted under the Regulations?
For example, a clothing manufacturer, during Alert Level 5, was prohibited from conducting its business as it was not considered an essential service at the time. Was this tenant obligated to manufacture cloth masks and essential personal protective equipment, which was not a prohibited trade at the time? Or perhaps a restaurant who was unable to trade for weeks during Alert Level 5 and 4 (and even part of Alert Level 3); was there a duty on those tenants to incorporate and offer their clientele home delivery services, when this was permitted, in order to ensure they could use their leased premises? The consequence may be that such tenant is unable to rely on the principles of impossibility of performance to avoid paying rental. Where, however, the purpose of the lease agreement is explicitly set out, one may argue that the premises are being used contrary to the lease agreement’s purpose and rental may be reduced on the basis of the partial impossibility of performance. Again, whether a reduction in or discharge of rental obligations is available would be dependent on the facts, the terms of the lease agreement and to be decided on a case-by-case basis. In our view, there can be no duty on a tenant to adapt its business to permit it to trade during these times.
Should you require specific legal guidance, please feel free to contact us.