COVID-19: Effects of the Crisis on Retail

The global COVID-19 outbreak has escalated incredibly quickly. Many retail landlords and tenants have already taken actions or agreed terms based on these hugely changed circumstances.

Background – trading conditions and closure of non-essential retail

Following the Irish Government’s requirement to close ‘non-essential retail’ premises and, prior to that, the pressures of declining footfall and increasing health and safety obligations, many retail landlords and tenants have closed stores.

Even for retailers that are deemed to be ‘essential’, trading conditions may make keeping stores open unsustainable for so long as the crisis persists.

Many tenants have already reacted to events by requesting or agreeing lease payment reductions, deferrals or suspensions or by simply closing stores. It remains to be seen how many landlords accept this, how the courts will view it if and when challenges arise and how the Irish Government intervenes.

We review below the legal principles that are relevant to these decisions. Our comments are based on the law as it stands now and do not consider any legal or other intervention that the Irish Government may make in the future.

The circumstances of the closure may be of particular relevance in each case. For example, the tenant’s case may be stronger if the landlord unilaterally decides to close the development or building, without the Irish Government requiring it to do so.

Can tenants reduce, suspend or defer lease payments?

We do not yet know how the courts will interpret unilateral tenant actions in these unprecedented circumstances, however it seems unlikely that many tenants will be able to point to a specific clause in a lease that will give tenants a unilateral right to alter their lease payment obligations.

If a landlord closes a development, the tenant may be able to claim that the landlord is in breach of the obligations it owes to its tenants under its ‘quiet enjoyment’ obligation, its obligation to provide access or its obligation to provide services. A claim of ‘non derogation from grant’ might also be made.

These would not be straightforward claims and, even if they are successful, they would not necessarily permit the tenant to alter its own payment obligations. The ability of the tenant to make this argument will also depend on the lease and the circumstances of the closure.

Rent suspension clauses

Many commercial leases will have a rent suspension clause which will typically allow for rent to be suspended where the premises is damaged or destroyed by an ‘insured risk’, ‘uninsured risk’ or ‘uninsured damage’. It seems unlikely that the COVID-19 crisis would fall within the ambit of these clauses based on the standard drafting that is used in Ireland, not least because these clauses usually only apply if there has been ‘damage’ to or ‘destruction’ of the property.

Frustration of contract

The legal doctrine of ‘frustration of contract’ could in theory allow a tenant to apply to court for termination of a lease. Frustration applies where a supervening event, not contemplated at the time of drafting the lease, leads to substantial changes to the responsibilities/rights of the parties rendering it commercially impossible for the parties to perform their obligations under the lease.

The test for frustration of contract is quite high and it is not clear that the current situation would pass that test. Even if ’frustration’ was an available remedy, many tenants may simply want a rent suspension, not an outright termination of their lease.

Force majeure

‘Force majeure’ clauses, another potential get-out for tenants, are very rare in leases in Ireland and, where they exist, will need to be considered on a case by case basis.

Can tenants close their store?

So long as the lease does not explicitly prohibit it, tenants should be able to close their store although this would not end the obligation to make payments under their lease.

Many leases, particularly in shopping centres, may however contain ‘keep open’ or similar clauses which oblige the tenant to keep the store open during specified hours. In a similar manner to the rent payment issue referred to above, there is no obvious standard clause in a lease that would allow a tenant to breach this obligation in the current circumstances.

Tenants may be able to make a claim of breach of contract by the landlord as referred to above but it is not clear that this claim would be held by a court to allow a tenant to breach the ‘keep open’ obligation.

What can a landlord do if the tenant closes or stops paying its rents?

There is no clear legal ground allowing tenants to stop paying lease payments in the current circumstances. This means that any unilateral action by a tenant may be held by a court to be a breach of the lease.

If so, the landlord would have various potential remedies including forfeiture of the lease, debt recovery proceedings, forfeiture of deposit (if any), claiming against any guarantors or taking an action to have the tenant company wound up.

It should be noted that the Emergency Measures in the Public Interest (Covid-19) Act 2020 introduced a prohibition on ‘evictions’. While the Act appears to be designed to affect residential tenancies only, there is an argument to be made that the prohibition applies not only to residential dwellings but to commercial tenancies also. It is unclear if this is the true intention of the Act.

Conclusion

The big questions in retail now are if, when and how the Irish Government will intervene to protect struggling retailers. We will advise further when this becomes clearer.

If you have any questions in relation to the issues in this article, please contact a member of our Real Estate team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.