Coronavirus: what lies ahead for landlords?
The headlines over the second March weekend recently said it all. EG led with: “Property prepares for pain as coronavirus spreads”; and the FT added: “Corporate lawyers in high demand as coronavirus hits businesses”.
Only two weeks ago, flooding dominated the headlines; “self-isolation” and “social distancing” were unheard of. How quickly our world has changed. Yet this is not entirely uncharted territory. In 2003, the world faced the onslaught of severe acute respiratory syndrome (SARS). Since then there has been swine flu, Ebola and the Zika virus. Early indications suggest that while these viral diseases were more deadly than the coronavirus disease 2019 (Covid-19), they were less contagious. We now face the unknown, a pandemic declared by the World Health Organisation, with possible crippling social and financial consequences. No wonder landlords and tenants alike are seriously concerned. Will tenants succeed in seeking rent suspensions, or terminating their leases, and will landlords be able to ride the storm?
Some guidance can be found in a Hong Kong case relating to the SARS outbreak in 2003. While it is a first instance case, the close analogy with current circumstances perhaps offers a little guidance to the approach our courts might take.
Li Ching Wing v Xuan Yi Xiong [2003] HKDC 54
Background
Li Ching Wing (L) was the owner of a flat in an apartment block (block E) in Kowloon. He let the flat to Xuan Yi Xiong (T) in 2002 for a term of two years. During the SARS outbreak in Hong Kong, some residents in block E contracted SARS. T vacated and moved in with his family on 29 March 2003. On 31 March, the Hong Kong Department of Health issued an order isolating block E for 10 days. On 1 April, the remaining residents of block E were evacuated. Following the expiry of the isolation order on 10 April, T and other residents moved back in.
The claim
On 24 April 2003, T sent a letter to L purporting to terminate his tenancy. L responded by accepting T’s letter as a wrongful repudiation of the tenancy agreement, and then issued proceedings claiming the balance of the rent due under the agreement and damages. T defended the proceedings on the primary ground that the tenancy agreement had been frustrated by the isolation order.
Frustration
The court in Hong Kong based its approach on the advice of the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, to the effect that frustration of a lease cannot occur unless outstanding performance of the contract in accordance with its terms differs significantly from what the parties reasonably contemplated. What is therefore required is a comparison of the likely period of interruption with the outstanding period of performance. In that case, the result was that a lease had not been frustrated, notwithstanding that the street which gave the only access to the demised premises was closed for over a year. As matters stand, no court has in our experience ever held that a lease has been frustrated.
In this case, as the isolation order only prevented access to the premises for a period of about 10 days, this was relatively insignificant in comparison to the two-year term, and therefore the court found that the tenancy had not been frustrated. As the judge said: “fear alone did not provide the tenants with a legal justification to terminate their tenancy agreements”.
The High Court here has recently re-examined the doctrine of frustration in Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch); [2019] EGLR 17, which concerned that other recent dominating topic of public concern, the effect of Brexit. The tenant, an agency of the European Union, held a lease granted in 2014 of part of premises in Canary Wharf, London, for a term of 25 years. When the UK gave its Article 50 notice of its intention to withdraw from the EU, the tenant took proceedings contending that the UK’s withdrawal would frustrate its lease on the ground, among others, that it would no longer be able lawfully to exercise the rights conferred on it by the lease, including the rights to occupy the premises or to assign. The judge rejected these arguments: the changes brought about by Brexit did not render the tenant’s occupation of the premises impossible and did not render the tenant’s performance under the lease something “radically different”.
It appears very unlikely, therefore, that a court will be willing to find that a lease has been frustrated, even if premises are temporarily closed as a consequence of a Covid-19 outbreak. However, it may at least be arguable that if a tenant has a short-term tenancy (eg, a pop-up kiosk), and if as a result of a future closure order the tenant could not access the premises for a substantial part of the term of its tenancy, it could successfully claim frustration of the tenancy. In cases involving longer terms, a tenant is unlikely to succeed – unless the period of enforced closure is very long (in which case we may all be doomed in any event).
Frustration is not the only expedient that may be argued in the event of an enforced closure. We turn now to consider other possible arguments.
Fitness for habitation
While a court is unlikely to be willing to imply a term as to the fitness of commercial premises, landlords of residential property may wish to consider their obligations under the Homes (Fitness for Human Habitation) Act 2018. Landlords could be liable under the 2018 Act if the premises are not fit for habitation due to a “prescribed hazard” which includes personal hygiene, sanitation and drainage. In Wing, it was noted that the spread of SARS in block E had been caused by the U-traps in the sewage systems in many of the flats being left dry, which had allowed the virus to pass from the building sewage system back to the apartments. While the court did not decide the point, it at least considered that it was possible that during the isolation order the premises were not fit for human habitation.
Derogation from grant
While derogation from grant was not considered in Wing, we consider that it is likely to be deployed by tenants over the coming months in the event that a landlord seeks to close the premises it occupies/trades from as a consequence of Covid-19. But how easy will it be for a tenant to succeed in such a claim?
In Platt v London Underground Ltd [2001] 2 EGLR 121, the tenant succeeded in arguing that the closure of an exit in an Underground station for a large proportion of the day constituted a derogation from the grant under its tenancy. Neuberger J set down a number of useful principles that are worth considering in any derogation from grant claim. In the different circumstances of a closure due to health concerns over a Covid-19 outbreak, a landlord may be able to defend any derogation from grant claim on the basis that it was contemplated by the parties that if there was a major incident which involved a serious risk to health, they would take steps such as closing shopping centres, without derogating from their grant. Quite apart from that, a landlord would be able to maintain that closure in such circumstances would be owing to the state’s ruling, and not to its own actions.
Rent cessers
Most leases will contain rent cesser provisions allowing the obligation to pay rent to be suspended during periods where premises are un-occupiable owing to the happening of a force majeure or other insurable event. Whether the drafting of the insurance provisions in a lease is wide enough to cover a Covid-19 outbreak will need checking.
Duties of care
Quite apart from these considerations, landlords and occupiers will also need to give careful thought to their duties of care at common law and pursuant to the many statutory codes that govern the safety of the public visiting their premises, and in particular those most likely to be affected, such as the elderly or those with an underlying health condition.
As we write, many public gatherings are being postponed or cancelled. Public and local authorities especially tend to err on the side of caution. Private concerns too (such as owners of multilet offices, shopping centres and clubs) should consider whether it might be sensible to postpone activities such as bridge classes and line dancing classes specifically aimed at those who might now be considered vulnerable. Although many of us take the view that life cannot close down, and that the decision whether to attend such activities is a personal one, landlords and others will nevertheless wish to assure themselves that they have carried out and implemented a proper risk assessment.
What is happening now?
Tenants are checking their business disruption policies. These may cover compulsory closure where there is a notifiable disease. Insurers have indicated they may resist any claims on the basis there is no physical damage to the property. Landlords are amending their standard form documents to include “epidemic or other health emergency” within the definition of a force majeure.
A major food retailer has written to landlords requesting a three-month rent-free period. Other tenants have employed footfall counters and seek to use that evidence to request rent reductions.
Everyone is looking to countries ahead of the UK in terms of the development of the virus – could a lockdown happen here? Shopping centres are of particular concern – cleaning equipment will generally run out in three to four weeks and further supplies from China are not available. A centre may face difficulties on these grounds.
While fear alone may not be a justification for a tenant to terminate its tenancy, it is likely to cause headaches in the next few weeks as the country battles the effects of Covid-19.
Simone Ketchell, Partner and Ben Rayner, Associate in the real estate disputes team at CMS Cameron McKenna Nabarro Olswang LLP
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