Swindon Property's client advisory and property management division are assisting Landlords and Tenants who are faced with contractual and rental issues caused by COVID-19. 

As the virus continues to spread and affect business, the only certainty seems to be uncertainty. What is becoming clear is that both the short term and long term economic effects of the outbreak are likely to be significant. In light of this, real estate clients are asking important questions regarding the potential legal issues COVID-19 may have on their rights as property owners and tenants. 

After having declared a National State of Disaster published in Government Notice No. 313 of Government Gazette No. 43096 on 15 March 2020, the Department of Trade and Industry has announced an exemption for the retail property section, which came into effect yesterday, 24 March 2020. This exemption specifically relates to clothing, footwear, home textile, personal care services and restaurants.  

Assessment of Applicable Lease Terms

Naturally, landlords will want to assess their exposure to the risk of lease terminations and defaults. Lease agreements should be reviewed to understand the contractual rights and obligations of both the landlord and the tenant in extraordinary circumstances.

Given the scope of this pandemic, business, societal considerations as well as government actions will likely have a significant effect on the contractual rights of landlords.

Reviewing Applicable Lease Terms

The starting point for any inquiry will be to review applicable lease terms. No well-written lease should allow for a tenant to withhold rent or terminate their lease based upon a downturn in the economy or their relevant markets. Many leases do, however, contain "force majeure" clauses that excuse or extend the time for performance of some lease obligations if a party is prevented from performing the obligation due to "acts of God" or other causes beyond the party's reasonable control. 

An applicable force majeure provision may not expressly list a "viral pandemic" or something similar as an action expressly covered by the clause. Still, certain actions applicable to the COVID-19 virus itself or the actions taken to slow its spread may expressly apply. For example, it is common for some force majeure provisions to include the inability of a party to perform due to regulations or orders of government authorities which arguably may apply to retail tenants. 

Events listed in most force majeure clauses, however, are generally presented as non-exclusive examples. Consequently, given the scope of the pandemic and the unprecedented responses by governmental authorities and the public, force majeure provisions could arguably apply whether or not a clearly applicable example in the clause is or can be identified. 

Even if a force majeure clause is applicable, however, it may expressly exclude the obligation to pay rent, meaning the timely payment of rent by the tenant should be required whether or not a force majeure event has occurred. Landlords should, therefore, review their leases to confirm such a carve-out is expressly provided for in the lease. If not, a landlord may be subject to claims by their tenants that the obligation to pay rent itself has been delayed by the occurrence of the COVID-19 pandemic.

Lease Insurance 

In addition to force majeure provisions, landlords should review the insurance requirements in their leases and confirm whether or not the tenant was required to maintain business interruption insurance. Even if not required by the lease itself, landlords may want to discuss whether a particular tenant has a business interruption insurance policy or potentially other insurance coverage to help cover their rent obligations until the COVID-19 emergency subsides. 

Certain actions might be necessary or advisable to ensure payments under any such policy are received and applied to rent, or that might otherwise benefit from coordination between the tenant and the landlord. 

Eviction Rights and Restrictions 

In the event tenants are unable to pay rent as a result of the COVID-19 pandemic, landlords will need to assess both the legal and business issues affecting their right to evict tenants. 

From a business perspective, landlords may find that eviction is not immediately their best or preferred option, whether due to the unavailability of replacement tenants or the overall optics of evicting tenants affected by such an unprecedented and global event. In such cases, landlords may need to negotiate with the tenants and should be prepared for the possibility of rent reductions or rent forgiveness for a period of time, or the deferral of rent and potentially spreading deferred rent over the remainder of the lease term. 

The ability of a landlord to make such concessions may, however, depend on its ability to negotiate similar concessions from investors or lenders as well as municipality whose returns or debt service payments are funded by the rent payments due.

In the end, it should not become the job of property owners and landlords to subsidize the losses caused by COVID-19, nor should the COVID-19 pandemic be a catalyst to significantly impinge upon the right of owners and landlords to protect their assets and investments through eviction or otherwise. 

Wide-scale evictions during a time of crisis, however, will not serve the interest of anyone. So, while these rights may be limited in the short term, hopefully all parties (landlords, tenants, governments, the business community, and individual consumers) can use that time to both ensure the pandemic is behind us and take steps to soften the financial impact of the crisis for everyone.

In conclusion, should you require a professional opinion and/ or wish to make use of the consulting and advisory services available to review and negotiate rental terms over this period with your tenants or Landlord, please contact us.

Leigh Maingard | Head of Property Management

+27 (82) 558 9971| leigh@swindon.co.za

Leon Breytenbach | Corporate Leasing & Advisory

+27 (84) 887 7112 | leon@swindon.co.za