Lease Considerations: Pandemic Clauses and Rent Suspension

Pandemic clauses

The pandemic has had a significant impact on the hospitality and leisure sector. Many businesses were unable to trade fully or at all and had to close, which has had a devastating impact on them.

In light of this, tenants are looking for more flexible leases with shorter terms and break options. In addition, tenants are looking to include “pandemic clauses” to provide either a rent reduction or rent suspension in the event of a lockdown or future pandemic.

Landlords are recognising that pandemic clauses are now going to be the new norm but that there is no standard industry wording at this point. Therefore, it’s useful to consider what provisions could be negotiated between the parties.

Rent suspension

Ordinarily, a rent suspension provision applies if damage to or destruction of the property makes it wholly or partially unfit for occupation and use. Often this is extended to common parts also. The tenant is then relieved from the obligation to pay rent for the suspension period. The landlord will take out loss of rent insurance to cover the rent suspension period, and the tenant will pay for that insurance. The standard provision normally states that rent is not suspended if an insured risk caused the damage and the tenant has vitiated the insurance policy, and the insurer refuses to pay.

Going forwards, tenants will want to ensure that the standard rent suspension provision is amended so that (1) the suspension applies to service charge as well as the annual rent because service charge will include expenses (such as maintenance and repair of common parts) that may still be incurred even in the event the property is damaged and (2)it applies where the tenant is prohibited, prevented or restricted from trading from the property as a result of a pandemic or lockdown.

From the landlord’s perspective, if the tenant wants the service charge to be suspended along with the annual rent, the landlord will want to make sure that the insurance rent covers the cost of a policy that pays out for the annual rent and service charge.

The landlord will also want to ensure that the rent suspension is not triggered if the tenant can still trade but decides not to if it is not cost-effective to stay open. They will, therefore, not want it to apply if the tenant is restricted from trading.

Whilst there is no standard industry wording at this point, we expect these provisions to be regularly requested by tenants in their leases going forwards.

Here to help

If you have any more questions or would like more information regarding pandemic clauses and rent suspension, you can contact our Property Litigation Team below.