Commercial Lease and Covid-19

For many businesses, the due date for their second quarter rent, or ‘quarterly gale date’ in landlord and tenant parlance, has now passed. Due to the exceptional circumstances that are presented by the Covid-19 pandemic, coupled with the fact that the Government has ordered the closure of non-essential businesses and temporarily restricted the movement of the citizens of Ireland, it is hardly surprising that tenants are struggling to meet payments for both rent and service charges as they fall due.

Is there any legal basis to claim an inability to pay the rent?

In general, a unilateral decision by any tenant to stop paying rent will constitute a breach of their lease agreement, which gives rise to a number of actions available to a Landlord, including, recovery of rent arrears, a claim against lease guarantors (if any), recourse to a rental deposit and/or forfeiture of the tenants lease.

While commercial leases do, at times, provide for a suspension of rental payments where there has been damage or destruction to a premises by an “insured risk”, as this pandemic causes no physical damage or destruction to any premises, the rent suspension provisions of a lease are generally unlikely to apply for Covid-19.

Other than a lease containing a force majeure clause (potentially allowing for either party to resile from the lease agreement), and subject to successfully making a legal argument that a lease agreement has been frustrated to the point where compliance with the terms of the lease is impossible, a tenant is generally committed to the payment of the rent in all circumstances.

What impact on the lease might a failure to meet the rental payments have?

Generally, in commercial leases, the failure to pay the rent within a specified timeframe after the ‘quarterly gale date’ has passed, leaves the tenant in an invidious position.

A tenant may be subject to the following challenges:

  • interest charges on the monies due and owing;
  • the landlord may be entitled to re-enter the premises and take back control (essentially forfeiture of the lease)
  • they may have offered the landlord a full indemnity against the costs of any action (including legal costs and damages) that they may have had to accrue as a result of action taken to recover the rent.

Unlike the UK, which has enacted the Coronavirus Act 2020 and introduced a moratorium on the  forfeiture of commercial leases until 30 June 2020, no such restriction applies in this jurisdiction (yet).

How then might the parties proceed?

Given the extreme nature of the event that has occurred, a tenant might consider requesting a change to the current lease with the landlord, to potentially include:

  • a rent discount;
  • an agreed payment plan for the deferred rent and/or a rent-free period;
  • payment of rent on a monthly (rather than quarterly) basis;
  • accepting rental payments in arrears, rather than in advance;
  • drawing on a tenants existing rental deposit in lieu of rent.

Critically, a comprehensive agreement setting out the terms of the variation is a critical document, as
both parties should ensure that in agreeing any of the above changes to the method of rental
payment that:

  • any break clause is not deemed to have been interfered with;
  • any rent review is not adversely impacted by any changes made to the rent schedule;
  • guarantor’s covenants (if any) are not impacted by any changes.

Only last Thursday, a furniture business secured an interim injunction, claiming it was being unlawfully evicted under the act. The argument presented by the business was that the legislation, introduced by the Government to freeze evictions in the residential sector, should be given its literal interpretation and therefore apply to commercial tenants also. Based on the clients that we currently act for, some clarity being brought to the situation would surely be welcomed by all sides.

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The material contained in this post is for general information purposes only and does not constitute legal advice. Specific legal advice should be sought on any particular matter. No liability whatsoever is accepted by PF Solicitors for any action taken in reliance on the information in this post.