Is there any guidance for UK commercial tenants who need to fulfill break option obligations by vacating premises during the current coronavirus (COVID-19) restrictions?

Is there any guidance for UK commercial tenants who need to fulfill break option obligations by vacating premises during the current coronavirus (COVID-19) restrictions?

 

The exercise of an option in a lease to end the term (a ‘break option’) is often subject to conditions. Those conditions must be strictly observed, unless the lease provides otherwise.

The date on which the conditions must be complied with may vary, but an obligation to give vacant possession of the premises is usually required to be met on the break date. In order to give vacant possession:

  • the premises should be free of any legal impediment to possession, such as a subtenancy

  • the tenant must generally have ceased using the premises for its own purposes (save for any de minimis use), and

  • the landlord must be able to have immediate and exclusive use and occupation of the premises without any substantial impediment (see Cumberland Consolidated Holdings v Ireland and Legal and General Assurance Society v Expeditors International (UK))

For further details and examples of cases in which the condition to give vacant possession was found to have been satisfied or not, see:

In order to comply with a break condition to give vacant possession on the break date, it may be necessary for a tenant to enter and clear the relevant premises. However, during times of social distancing and with compulsory closures of some businesses in place, it is necessary to look at whether such action is lawful and/or physically practicable.

Closure of businesses

In England, the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (the Regulations), SI 2020/350, are in force exercising powers under the Public Health (Control of Disease) Act 1984.

The Regulations, SI 2020/350 include:

  • in relation to certain businesses, requirements for a ‘person responsible for carrying on a business’ (which includes the owner, proprietor and manager) to close premises and businesses (the Regulations, SI 2020/350, regs 4 and 5)

  • restrictions on anyone leaving their home without a ‘reasonable excuse’ (the Regulations, SI 2020/350, reg 6)

Failure to comply with the Regulations is an offence, punishable by a fine (the Regulations, SI 2020/350, reg 9). Where a corporate entity is in breach of the Regulations then an officer of the company may also be guilty of the offence and is liable to be prosecuted (the Regulations, SI 2020/350, reg 9(5)).

Whether a tenant can access premises may depend on the type of business that it operates. For example:

  • businesses listed under the Regulations, SI 2020/350, Sch 2, Pt 1 (premises that serve food and drink) are required to close the premises (or the part of the premises) in which food and drink are sold for consumption on those premises and cease selling food and drink for consumption on its premises (the Regulations, SI 2020/350, reg 4(1))

  • businesses or services listed in the Regulations, SI 2020/350, Sch 2, Pt 2 must cease carrying on that business or providing that service (the Regulations, SI 2020/350, reg 4(4))

Arguably, this does not, in itself, prevent workers accessing the premises to take action to ensure compliance with break conditions.

However, the position is a little less clear for businesses that offer goods for sale or for hire in a shop or provide library services and that are not listed in the Regulations, SI 2020/350, Sch 2 Pt 3. Such businesses must not only cease to carry on the business or service (except via delivery services) and close any premises that are not required to carry on such delivery services as are permitted, they must also 'cease to admit any person to its premises who is not required to carry on its business or provide its services' so far as they are permitted to continue (the Regulations, SI 2020/350, reg 5(1)). The final requirement not to admit any person to its premises arguably may prevent any person accessing the premises, making compliance with the break condition illegal.

The closure of other businesses is not specifically required by legislation at this stage. Government guidance on COVID-19: guidance for employees, employers and businesses includes a section on ‘Keeping your business open’.

It states that:

  • the government is not asking any businesses that have not been specified to close and that 'it is important for business to carry on'

  • businesses should encourage employees to work from home unless it is impossible for them to do so

It also recognises that it may not always be possible to require employees to work from home.

If the tenant’s business is not subject to specific requirements to close, then it may consider that allowing access to workers for tasks needed to comply with a break condition is part of operating its business. However, the restrictions on movement of people under the Regulations must also be considered by all businesses, whether or not they are subject to compulsory closure.

Restrictions on movement of people and gatherings

Currently, no person can leave their home ‘without a reasonable excuse’. What constitutes a ‘reasonable excuse’ is specifically defined and includes several exceptions that may be applicable, but should be carefully considered in the particular circumstances (the Regulations, SI 2020/350, reg 6).

A person can leave their home ‘to travel for the purposes of work…where it is not reasonably possible for that person to work….from the place they are living’ (the Regulations, SI 2020/350, reg 6(2)(f)). A tenant might argue that it is not possible for the work required to deliver vacant possession to be done without accessing the premises and therefore, the relevant employees or contractors are permitted to travel to the premises to carry out the necessary work.

A person is also permitted leave their home 'to fulfil a legal obligation, including attending court or satisfying bail conditions or to participate in legal proceedings' (the Regulations, SI 2020/350, reg 6(2)(h)). A tenant might argue that it is a legal obligation to deliver vacant possession and therefore the relevant employees or contractors are permitted to travel to the premises to carry out the necessary work, however, the examples given in the legislation all relate to legal proceedings and therefore it is unclear whether a pure contractual obligation amounts to a ‘legal obligation’ for these purposes, especially in light of the fact that there is a separate exception for moving house where reasonably necessary.

There are also restrictions on gatherings of more than two people, however, there are limited exceptions, including:

  • where the gathering is essential for work purposes

  • where reasonably necessary to participate in legal proceedings or fulfill a legal obligation

(the Regulations, SI 2020/350, reg 7).

Health and safety and duty of care

Even if a tenant determines that accessing the premises to comply with a break condition does not contravene the Regulations, it will still need to consider its responsibilities to its employees and any contractors who will carry out the work. In particular, the tenant should comply with Guidance for employers and businesses on coronavirus (COVID-19), issued by the government. It should consider any practical implications, such as how to maintain social distancing while taking the required action to deliver vacant possession, the availability of necessary contractors and how to plan for the possibility that the relevant people may be unable to attend on the scheduled move date due to developing symptoms or being otherwise required to self-isolate. It may be sensible to build in timings to allow the date to be rescheduled in such instances.

As the situation is currently rapidly evolving, the tenant should analyse whether there are any other restrictions on movement or accessing premises at the relevant time, for example measures may be implemented under section 52 and Schedule 22 to the Coronavirus Act 2020.

In these unprecedented times, even where a tenant believes it is legal to take action to comply with its break conditions, due to the uncertainty and evolving nature of the situation, a tenant may prefer to liaise with the landlord (on a without prejudice basis if appropriate) to consider whether it is possible to agree a waiver or amendment to the break condition or to attempt to negotiate an extended period of time for exercise of the break option or enter into an agreement for a surrender which will take place subject to compliance with the pre-conditions, at a later date. Tenants should, however, be aware that there is no obligation on the landlord to agree any such concession. A landlord may be reluctant to facilitate termination of the lease in the current conditions and a tenant should ensure that any agreement with the landlord is properly documented and legally binding.

What if it is, or becomes, unlawful to access the relevant premises?

In the event that it is actually unlawful either now or in the future to access premises (and remove chattels etc in order to provide vacant possession) as a result of coronavirus, consideration should be given to the impact of that on the vacant possession pre-condition, and the break option more generally.

The High Court case of Byrne v Inntrepreneur Beer Supply Co Ltd (formerly known as Courage Ltd) related to an application under previous Order 14A of the Rules of the Supreme Court (Revision) 1965, SI 1965/1776, whereby the court made a summary determination of issues of law or construction. In that case, under clause 26 of a five year lease, there was an option to renew for a further five or ten year lease, subject to five pre-conditions. Two of the issues determined related to the tenant’s argument that they did not comply with one of the option pre-conditions (clause 26(1)(b)) because it was void on the basis of being anti-competitive. The High Court held that:

  • assuming that the clause 26(1)(b) pre-condition was void, that did not mean that the clause 26 option could not be exercised; that condition could be severed. Part of the reasoning was that the pre-condition in question could not be said to the be sole consideration to be provided by the tenant:

    ‘…I accept his submission that, in the event of Clause 26(1)(b) falling foul of Article 85, this would not in itself have invalidated the option: in other words, the remainder of Clause 2(26)would survive. In this context, although I consider that my conclusion is supported by the reasoning on severability in Cound, Boyes and Mason, and indeed is supported by the conclusions reached in the latter two cases, I also draw assistance from observations of Millett LJ in Marshall, to which I have already referred. It cannot be said that satisfying Clause 26(1)(b) was anything like the sole consideration to be provided by the Lessee in return for being able validly to exercise the option; he also had to satisfy the requirements of Clause 26(1)(a) and (c), (d) and (e)….

    …Even assuming the requirement at Clause 26(1)(c) wholly falls away because of Article 85, I do not see how it can be said that compliance with paragraphs (b) and (c) can be said to have been “the real consideration” “or the main consideration” or “ the whole or substantially the whole consideration” for the exercise of the option. I accept that they may well have constituted a substantial part of that consideration, but, on the test approved by Millett LJ in Marshall, that is not enough. I cannot help observing that, in the great majority of options for renewal of leases, there are normally only two prior conditions which have to be satisfied for exercise, which are effectively those contained in Clause 26(1)(a) and (e)in the present case (see in Bass Holdings Ltd v Morton Music Ltd [1988] Ch 493 at 518C per Kerr LJ). Whether or not that is something which is appropriate to take into account, I am satisfied that the second step in Mr Brealey's argument on this point is correct.’

  • it was open to the tenant to claim damages even though to do so they have to rely on the invalidity of clause 26(1)(b) in order to respond to the landlord’s contention that they did not comply with that pre-condition:

    ‘…Accordingly, if the defendant's argument on this point is correct, the surprising result appears to be that, if Clause 26(1)(b) offends against Article 85, the plaintiff nonetheless had to comply with it to the letter, if he wishes to exercise the option, just as much as if the Clause did not offend against Article 85. On the other hand, if the plaintiffs argument on the point is correct, he can exercise the option provided he has complied fully with the other four conditions in so far as they do not involve breaching Article 85, but he is not obliged to have complied with Clause 26(1)(b). That appears to be an entirely sensible result, in that Clause 26(1)(b) is effectively treated as excised from Clause 26, the option survives, albeit appropriately severed, and the aim of Article 85 is achieved.’

As stated in Byrne, when it comes to severance of whole or entire covenants, the general test or guideline is well-established by the case law: it is whether the illegal promise is substantially the whole or main consideration for the promise sought to be enforced. See Commentary: Severance of whole or entire covenants: Common Law Series: The Law of Contract [5.187]–[5.189].

Applying the above to a break option scenario, clearly, the vacant possession element of a break option is fundamental to the exercise of the break. However, it may not always be the ‘main’ or ‘whole’ consideration depending on the nature of any other pre-conditions, for example a pre-condition as to payment of rent may be seen as equally fundamental.

Importantly, however, in the Byrne case, the provision itself was void (on the basis of being anti-competitive), whereas in a coronavirus scenario, the provision for providing vacant possession is perfectly legal. The difficulty only arises because the tenant may breach regulations when trying to comply with it at the moment. That appears to be a crucial distinction from the Byrne case.

It should also be noted that Byrne was a High Court case and comprised a summary determination and accordingly may be of limited Precedent value.

Accordingly, full consideration would need to be given to the nature of the pre-condition(s) of the break option and whether not the condition itself could be said to be unlawful in the context of relevant coronavirus legislation and/or regulations. In the event that the pre-condition itself could be said to be unlawful, consideration should be given to the established case law in respect of severance of illegal and void provisions. For more information in that regard, see Commentary: Severance of illegal and void provisions: Halsbury's Laws of England [250].

From a practical perspective, clearly there is no precedent for this situation. However, there is long-established authority for the strictness of compliance with break options. It may therefore be prudent to liaise with the landlord, on a without prejudice basis if appropriate, in order to attempt to negotiate an extended period of time for exercise of the break option or enter into a surrender agreement for a surrender which will take place subject to compliance with the pre-conditions, at a later date.

For further information in respect of break options more generally, see Practice Notes:

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