14 Apr 2020
Euan McSherry, Aberdein Considine’s Head of Dispute Resolution, considers some issues of interest to commercial property market in this period of uncertainty.
The Coronavirus (Scotland) Act 2020 came into force on 6 April 2020. In relation to commercial leases, the Act gives commercial tenants in Scotland additional protection from irritancy.
This protection will apply until 30 September 2020, with the Scottish ministers having powers to extend or bring forward the expiry date. Otherwise, the contractual obligations which bind commercial landlords and tenants remain in full force.
(1) Change to right to terminate
Irritancy is often not an attractive option to commercial landlords as it results in an empty unit and rates liability, in normal times. Prior to amendment, the governing legislation dictated that, in the case of a monetary breach, a commercial tenant must be given at least 14 clear days (post-service of a formal warning notice) to make payment before irritancy enforcement action could be taken, absent payment. The Act extends the warning period to 14 weeks for all commercial tenants and voids any pre-Act notice if the notice period in the notice has not yet expired.
There is no change in the case of a non-monetary breach. The position remains that a landlord will not be entitled to terminate the lease if, in all the circumstances of the case, a fair and reasonable landlord would not do so; and where the breach is capable of being remedied, the tenant must be given a reasonable period (post-service of a formal warning notice) to remedy the identified breach.
(2) Force majeure
Across all Sectors, clients have been seeking advice on force majeure clauses. For a commercial tenant to have good prospects of succeeding with an argument that the Covid-19 outbreak amounts to a force majeure event - an event outside the reasonable control of a party and which prevents them from performing their contractual obligations - they will likely need to have express wording which can be read to include this outbreak. Such wording is not common in a modern commercial leases. If the lease doesn’t have a force majeure provision, you can’t rely on a force majeure argument.
Modern commercial leases generally provide for a suspension if the premises are damaged, destroyed or unusable due to an insured risk. The latter is unlikely to include the coronavirus outbreak. If the lease does not provide for a rent suspension, a landlord is not obliged to accept any suspension and the tenant will need to pay the rent. Many commercial landlord and tenant clients have already agreed, and documented, rental holidays. Some common issues have arisen and are set out below to assist or provoke conversations: (1) Is rent to be waived, in full or in part? (2) Or, is a rental holiday being given? (3) In either case, is this for a set period or is it open-ended? If the latter, consider agreeing a review date and a means for review. (4) When, and how, is accrued but unpaid rent to be repaid? In full by a set date or by tranches? (5) What, if anything, is to happen to rental interest on accrued rent? (5) If relevant, should repayment be made a pre-condition of a Tenant’s right to exercise a break option? (6) If relevant, should repayment be made a terminal obligation if a lease is not continued by tacit relocation? (7) How is any variation to be recorded? By back letter or formal variation?
Commercial landlords ordinarily have the ability to commencing debt recovery actions for non-payment of rent, rental interest and other monetary sums owed by tenants. At present, the Court of Session is only dealing with "essential business". Only 10 of Scotland's Sheriff Courts remain open; and they are only dealing with "emergency" civil applications. The onus would be on a commercial landlord to demonstrate that their action satisfies either test. Many commercial landlords have had rental recovery actions put on hold by the Courts. Until the Scottish Courts’ tests change, this option has been, in effect, suspended.
It is possible that more commercial tenants will exercise break options and give notice of intentions to terminate leases in the months ahead. Where a landlord does not have the protection of an upwards only rent review provision, a commercial tenant may trigger rent reviews in a bid to take advantage of what are likely to be depressed market conditions.
There is going to be immediate and significant financial hardship for the majority, if not all, involved in the commercial property market. My view is that early, pragmatic discussions can help both landlords and tenants through this very difficult and challenging time. In all probability, the impact of a UK-wide lockdown will be felt by the commercial property market generally for many months, and possibly years, to come.
If any issues arising out of this article are of interest, please contact Euan McSherry, Aberdein Considine’s Head of Dispute Resolution at email@example.com or 07818 097172.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. Aberdein Considine is not responsible for any activity undertaken based on this information.