1. Do tenants who cannot use their properties because of the coronavirus still have to go on paying their rent?
These are strange times. Across the Cayman Islands, stores, bars, offices, gyms, industrial premises and most other places of business are closed. The government has ordered them to close[1 ]and the people who would otherwise be running those businesses have been ordered to stay home.[2] Lots of properties that people use as a second home or as a rental property are also lying empty for the same reason. Many of these properties are rented from a landlord and the tenant has to pay rent for them. But if tenants cannot actually use the property that they are renting, do they have to carry on paying their rent, in full, to the landlord?
That is the question every tenant of a rented property on the Islands should be asking himself – landlords, too, for that matter.
This article – which is a collaboration between William Jones, a partner in Ogier's Cayman Islands dispute resolution team, and Nat Duckworth, a barrister specialising in landlord and tenant law in London – examines the different kinds of arguments that tenants might put forward as to why they should not have to pay their rent, or all of it, during lockdown and the ways in which landlords might seek to answer those arguments, if raised by their tenants. To do that, it is obviously necessary to delve into a few legal questions, but the below is intended to tell landlords and tenants what they should be thinking about.
Each case, and in particular each lease, is different, so landlords and tenants should always take their own legal advice. But, in summary, landlords and tenants should be thinking about the following questions:-
• Does the lease contain a rent suspension or rent abatement clause that applies in the current circumstances?
• If not, is it an implied term of the lease that the rent should now be suspended or reduced?
• Alternatively, has the recent legislation requiring businesses to close resulted in “frustration” of the lease such that it is now at an end?
• Alternatively, is the legislation a “supervening illegality” and, if so, does that mean that the tenant’s rent is suspended?
• If the tenant cannot use the property, is the landlord in breach of the “covenant for quiet enjoyment" and therefore liable to pay damages to the tenant?
• Is the landlord obliged to pursue a claim under the property’s insurance policy and to credit the tenant with the proceeds when the insurer pays out?
• If the landlord “forfeits” the lease for non-payment of rent, would the court make the tenant pay all or just part of the arrears as the price of getting his lease back?
We explore each of the above questions below.
2. Rent Suspension and Rent Abatement Clauses
The first port of call should always be the written lease. Many leases have a specific clause that suspends a tenant’s obligation to pay the rent in certain events. Typically, the clause will suspend rent if the property is damaged or destroyed by some natural disaster (like a hurricane) and is incapable of being used as a result. That does not really help here because, although tenants cannot currently use their properties, they have not been “damaged or destroyed”.
But some clauses will be broader and will catch cases where the property cannot be used because of “legislative intervention”, “government action” or even sometimes “infectious disease”. A clause of that kind may give the tenant a straightforward contractual right to suspend payment of rent until things get back to normal. Sometimes the rent suspension clause will be linked to the insurance policy that the landlord or the tenant maintains for the property. If so, you will need to get hold of the insurance policy and find out what events it covers.
Not every clause will suspend the tenant’s rent completely. Some of them say that the tenant’s rent should be reduced (or abated as leases often call it) by a proportionate amount.
Whether the clause is triggered and, if so, how much the tenant gets off the rent and for how long are all questions of interpretation of the tenant’s particular lease. The answers to those questions are not always clear and easy. Landlords and tenants should take legal advice on the strength of their position before acting on a rent suspension or abatement clause.
Tenants should look into this quickly. Some leases suspend or reduce rent if and only if the tenant gives written notice to the landlord of his intention to rely on the clause “promptly” or within some specified time. So tenants should act fast or risk losing out.
3. Implied Terms
If your lease does not contain a specific clause dealing with rent suspension or abatement, that is not necessarily the end of it. Not every term of a lease shows up in the black and white of the written document: some are implied into it. Some terms are implied into leases by legislation[3] and others are implied, under the general law, on the basis they represent what the landlord and tenant must have meant, but forgot to say in their lease.[4]
If there is no specific rent suspension or abatement clause in the lease, section 52 of the Registered Land Law (2018 Revision) nevertheless implies a term that suspends all or “a just proportion” of the rent where the leased property is “destroyed or damaged by fire, earthquake, hurricane, flood, civil commotion or accident not attributable to the negligence of the lessee … so as to render the leased premises or any part thereof wholly or partially unfit for occupation or use” (unless expressly excluded by the terms of the lease). But, again, this is no good to the locked-down tenant because their property is not “damaged or destroyed” and section 52 does not therefore apply here.
But a tenant may still wish to argue that a rent suspension or abatement provision should be implied under the general law. There is case law in the UK which says that where an event occurs that the landlord and the tenant simply did not expect and cater for in their written lease, and it is obvious what they would have agreed should happen in that event, you can imply an extra term into the lease to fill the gap[5].
But a word of warning for tenants and reassurance for landlords: this is not an easy argument for the tenant to make. You can only imply a rent suspension or abatement provision if it is clear that both parties intended it to go into the lease and it must likewise be obvious what they would have said if they had been prompted to spell out in their lease whether the tenant still has to go on paying rent if the government later stops the tenant from using the property.
A tenant might well successfully argue that the coronavirus and the lockdown to which it has led is an unforeseen event that has not been catered for in the written lease – after all, no-one other than Bill Gates saw this coming – but it may be harder for the tenant to show what the parties would have said if they had been prompted to say what happens about rent in a lockdown situation. No doubt a tenant would say: “I’m not paying rent for a property I can’t use, through no fault of my own”. But the landlord would say: “I shouldn’t lose out on rent because of things beyond my control – the tenant should bear the risk of this kind of thing happening”. If there is no obvious consensus, there is no implied term.
But a tenant might argue that there would be consensus about this: a reasonable landlord and a reasonable tenant would agree that neither of them should shoulder the consequences of lockdown, alone, and that they should instead split the pain between them.[6] That being so, it could be argued that the tenant should pay half the normal rent during lockdown. Alternatively, it could be argued that a business tenant should receive a reduction in rent proportionate to the reduction in his turnover during the lockdown period. This is undoubtedly a difficult argument for the tenant to make – the landlord definitely starts as favourite in this contest – but an outcome that ‘splits the pain’ somehow feels fairer and a sympathetic judge might just go for it. Even if the risk of losing is small, a landlord may prefer to do some sort of deal on the rent, rather than go to court, especially if the landlord has lots of other tenants who would all demand similar rent reductions if the landlord lost in court.
Landlords, you should scour your lease to see if there is anything in there that makes an implied term less likely. Some residential leases stipulate that the landlord does not “warrant” (ie guarantee) that the property will be “fit for occupation” or “fit for the tenant’s purposes” throughout the term of the lease, while some business leases say that the landlord does not warrant that the tenant’s particular business can lawfully be carried on at the property. If there is a provision of that kind in the lease, the tenant’s chances of successfully arguing that he gets an implied rent discount now that the law has changed on him will start to look pretty remote.
4. Frustration
Another possible approach to the problem would be for the tenant to argue that the lockdown restrictions have “frustrated” his lease and that no further rent is therefore due from him[8].
A lease will be frustrated if something unforeseen later happens that so fundamentally changes the basic deal that the law treats the lease as being at an end[9]. But the bar is very high and just about every tenant who has ever argued in court that their lease has been frustrated has failed. Notable failures include:
• the Hong Kong tenant who said that his lease had been frustrated because he was ordered to leave his flat following an outbreak of SARS in the block; [10]
• closer to home, the tenant of the Cayman Arms who said that its lease had been frustrated because its liquor licence had been refused and the Director of Planning had in any event ordered its kitchen to be demolished. [11]
• most recently, an agency of the European Union which said that the lease of its London headquarters would be frustrated once the UK ceased to be a member of the European Union following the Brexit vote. [12]
The main stumbling block for tenants is that if the bar on making use of the property is just a temporary one and if there is still plenty of time left on the lease, the court will generally take the view that the tenant will still get some value out of his lease and therefore no frustration occurs.[13] Landlords in Cayman will say that lockdown is just temporary so the same applies here. Unless the lease is really short, tenants will find it hard to suggest otherwise. In any case, unless the tenant actually wants their lease to end and is ready to leave the property for good,[14] he will not want to argue that the lease has been frustrated – there are better ways of trying to get a discount on the rent.
5. Surpervening illegality
An alternative approach is for the tenant to argue that, although the lease has not been frustrated, he is nevertheless temporarily relieved of the duty to pay rent on the grounds of “supervening illegality”. If that argument works, it would be the best of both worlds because the tenant keeps his money and his lease.
A court will not order someone to break the law. So if new legislation means that a tenant can no longer legally comply with an obligation in his lease, the law treats him as being excused from doing so.[15] A tenant of a bar in Cayman could say (quite correctly) that he cannot currently use the property for its intended purpose without committing a criminal offence.[16] The tenant could also say that, for the time being at least, any clause in his lease that says that he must keep on trading as a bar is suspended and does not apply to him. If that obligation is, in effect, frozen, so too must the obligation to pay rent to his landlord, the tenant would argue.
As logical as that sounds, the tenant would need to make some new law here if he is to succeed. There is English case law, from the time of the First and Second World Wars, which says that tenants do not get let off the rent even if legislation makes using the property illegal.[17] The thinking behind those decisions was that it is the use of the property that was made illegal – making payments to the landlord was not prohibited by law. That case law is now quite old, and perhaps it is time for a tenant to ask the court to consider this question again with fresh eyes, but the landlord again starts as clear favourite here.
6. Covenant for quiet enjoyment
Most residential and business leases contain what is called a “covenant for quiet enjoyment” which is the landlord’s promise that the tenant will have uninterrupted use of their property until the end of the lease.[18] Even if the written document does not contain such a clause, one is implied into the lease.[19]
A tenant might therefore argue that the landlord is not providing him with “quiet enjoyment” of his property whilst lockdown restrictions apply and claim damages (ie compensation) from the landlord for an amount equal to the rent paid during the lockdown period. But the landlord has a simple answer to that argument: it is only the things done by the landlord (or someone acting on his behalf) that may give rise to a breach of the covenant for quiet enjoyment[20] – steps taken by the government do not therefore count.
7. Insurance
Even if the tenant does have to pay the rent to the landlord in the first instance, he might be able to get some or all of it back by another route. If the tenant has its own insurance that covers business interruption caused by disease or government action, he can simply claim on the insurance. But not every tenant will be in that happy position.
Some leases require the landlord to insure the building and make the tenant pay for that insurance through service charge or maintenance payments. A well-drafted lease will say, in terms, that the landlord must claim on the insurance policy, whenever possible, and must credit the tenant with the proceeds once the insurer pays out. So the tenant pays the landlord first and gets reimbursed later.
Even if, as often happens, the lease does not actually spell out that the landlord must claim on the policy and credit the tenant with proceeds, the court will generally imply a term to that effect.[21] This another good reason to look closely at the insurance policy for the property. If the policy covers losses incurred because of lockdown, the tenant should be okay.
Landlords, you need to think about this too. It is not uncommon for insurance policies to say that the insurer only has to pay out if notice of the claim has been given to the insurer “promptly” or within some specified period of time. If the landlord does not give notice in time and the claim is then refused by the insurer, a tenant may sue the landlord for damages for breach of the obligation in the lease to pursue the claim on the tenant’s behalf. If that happens, it will be the landlord, and not the tenant, who loses out.
8. Relief in Forfeiture
Suppose the tenant either cannot pay or refuses to pay the rent during lockdown and the landlord then “forfeits” (ie terminates) the lease on the grounds of non-payment of rent.[22] If that happens, the tenant will have to apply to the court for “relief from forfeiture” in order to get his lease back. If the court grants relief, there will be conditions attached to it. Those conditions will ordinarily include paying off any arrears of rent, in full, quickly.[23] But it is also true that the court has a discretion about what conditions to impose[24] and it is just about possible that a judge would give the tenant back his lease (ie grant relief) and only require the tenant to pay part of the rent owed to the landlord from the lockdown period for that privilege.[25]
Given that the terms of relief are discretionary, judges may feel that they are able to show tenants a little mercy and, in so doing, spread the financial consequences of lockdown more evenly.[26] Equally, judges may just harden their hearts and apply the usual rule that if the tenant wants his lease back, he has to pay off the arrears of rent in full. If a tenant finds himself in the position of having to apply to court for relief from forfeiture, it might be worth giving this argument a go.
9. Other things to think about
As if that were not enough for us all to be thinking about, there are a good number of other lockdown related issues to which careful thought should now be given by landlords and tenants:
• Service charges: if the lease requires the tenant to pay service charges or maintenance charges to the landlord, but the relevant services are either not being provided at all or are being provided but in circumstances where the tenant (who is stuck at home) is getting no benefit from them, does the tenant still have to pay for those charges during lockdown? [27]
• Break clauses: many leases contain early “break clauses”. Typically, a break clause is drafted so that the lease only comes to an end if the tenant gives “vacant possession” of the property by the time the break notice expires. That means the tenant must remove himself and all his belongings from the property if he is to successfully break the lease.[28] If the tenant cannot remove his belongings in time (because he is not granted permission to leave his house), does the lease end or continue?
• Expiry of the lease: what happens if the lease naturally ends during lockdown? Normally, if the tenant remains “in occupation” of the property and pays the rent after the expiry of the original lease term, he gets a new periodic lease and can therefore stay on.[29] If the tenant is stuck at home when the lease expires, is he “in occupation” or “out of occupation” for these purposes?
• Rent review: a business lease of any length will usually contain “rent review” provisions designed to ensure that the rent paid by the tenant keeps pace with property prices and inflation. Rent review provisions almost invariably require an assessment to be made of the open market rental value of the property on a given date. If that date happens to fall during lockdown, the rental value for the property may be much reduced by comparison with pre-coronavirus values. So does the landlord get stuck with an artificially low rent or should the rent be reviewed by reference to a notional pre-coronavirus market?
• Clawing back overpayments of rent: what if a tenant pays the landlord the full rent without noticing that his lease has a rent suspension clause – can he get it back when he realises his mistake?[30]
10. Parting words
The coronavirus is an unprecedented event. The lockdown measures implemented in response to it give rise to all sorts of questions that property owners and businesses simply have not had to think about before. The best advice, for both landlords and tenants, is to get ahead of this: look at your lease, take advice about its contents and put a clear strategy in place, sooner rather than later.
[1] With some limited exceptions: see the Public Health (Prevention, Control and Suppression of Covid-19) Regulations 2020, r.5-8.
[2] See r.8 of the 2020 Regulations and section 49 of the Police Law (2017 Revision) (curfews).
[3] See sections 52 and 53 of the Registered Land Law (2018 Revision)
[4] See Marks and Spencer v BNP Paribas [2015] UKSC 72.
[5] In Arnold v Britton [2015] AC 1619, Lord Neuberger’s sixth principle of construction was that “…in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention. An example of such a case is Aberdeen City Council v Stewart Milne Group Ltd 2012 SC (UKSC) 240, where the court concluded that “any . . . approach” other than that which was adopted “would defeat the parties’ clear objectives”, but the conclusion was based on what the parties “had in mind when they entered into” the contract…”.
[6] See arguments for and against an implied term are discussed in articles by Nat Duckworth and Kester Lees: see https://www.falcon-chambers.com/publications/articles/does-a-tenant-really-have-to-go-on-paying-rent-during-lockdown-perhaps-we-s and https://www.falcon-chambers.com/publications/articles/rent-during-covid-19-landlords-still-hold-the-strongest-hand
[7] In Australia, for example, there is about to be legislation introducing a mandatory code of conduct affecting landlords and tenants of commercial properties. The measures will include proportionate rent reductions tied to the tenant’s reduction in its turnover during the affected period so as to give effect to the overarching principle “…to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords”: https://www.pm.gov.au/sites/default/files/files/national-cabinet-mandatory-code-ofconduct-sme-commercial-leasing-principles.pdf
[8] If the lease has been frustrated, the financial consequences, including what happens to rent already paid, fall to be dealt with under Part II of the Contracts Law (1996 Revision).
[9] The classic test for frustration is that set out by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC [1956] AC 696, at 729: “frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.” The classic example of frustration, that gets taught to every law student, is the case where someone hired a flat for two days in order to be able to view King Edward VII’s coronation ceremony as it came past the window only to find that the ceremony was cancelled when King Edward fell ill: Krell v Henry [1903] 2 KB 740.
[10] See Li Ching Wing v Xuan Yi Xiong [2003] HKDC 54.
[11] See English Shoppe v Cayman Arms (1982) Limited [1994 – 1995 CILR 139]
[12] See Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch)
[13] See National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675. For a more detailed discussion of frustration of leases in the UK context coronavirus legislation, see Mark Galtrey and Imogen Dodds’ “Coronavirus: a frustrating situation”: https://www.falcon-chambers.com/publications/articles/coronavirus-a-frustrating-situation
[14] If the lease is frustrated, it is ends for good; it will not spring back into existence once the lockdown restrictions are lifted.
[15] See Cricklewood Property & Investment Trust Limited v. Leighton's Investment Trust Limited [1945] A.C. 221 at 234 and 244 where it was said that a tenant who could no longer comply with a covenant to build shops on the leased land because of war-time restrictions on building had a lawful excuse not to comply with the covenant for so long as the restrictions remained in place. See also John Lewis Properties Plc v Viscount Chelsea (1994) 67 P&CR 120 where a tenant was excused compliance with a covenant to demolish a building because it had since become a Grate II listed building and could not therefore lawfully be demolished.
[16] Under section 5(4) and 8(4) of the Public Health (Prevention, Control and Suppression of Covid-19) Regulations 2020.
[17] See London and Northern Estates Company v Schlesinger [1916] 1 KB 20; Matthey v Curling [1922] 2 AC 180 and Cricklewood Property & Investment Trust Limited v. Leighton's Investment Trust Limited [1945] A.C. 221.
[18] As to which see Kenny v Preen [1963] 1 QB 499.
[19] See section 52(a) of the Registered Land Law (2018 Revision).
[20] See, for example, King v Liverpool City Council [1986] 1 WLR 890 (CA) where it was held that damage to the tenant’s property by vandals did not give rise to a breach of the covenant for quiet enjoyment.
[21] See Mumford Hotels Ltd v Wheler [1964] Ch 117; see further Vural Ltd v Security Archive Ltd (1989) 60 P & CR 258 where the landlord’s duties were described as being “fiduciary or quasi fiduciary in nature”.
[22] In England (but notably not here in Cayman), legislation has been passed that prevents a landlord from forfeiting a business lease during lockdown: see section 82 of the Coronavirus Act 2020.
[23] See Inntrepreneur Pub Co (CPC) Ltd v Langton [2000] 1 EGLR 34, per Arden J.
[24] Section 57 of the Registered Land Law (2018 Revision) says that the “…court may grant or refuse relief, as the court, having regard to the proceedings and the conduct of the parties and the circumstances of the case, thinks fit, and, if it grants relief, may grant it on such terms as it thinks fit.”
[25] The English case law leaves the door very slightly ajar for an order of that kind: see Re Naeem [1990] 1 WLR 48. See also House Property v James Walker [1948] 1 KB 257; Associated British Ports v C H Bailey [1990] 2 AC 703 and Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2016] AC 293 (a BVI case), albeit in the context of relief from forfeiture for breach of other covenants in the lease, rather than non-payment of rent.
[26] Although the jurisdiction to grant relief has now been placed on a statutory footing, the origin of the jurisdiction lies in equity – a branch of the law that is deeply concerned with ‘fairness’.
[27] There is obviously some overlap with the question of rent here, but the answer will not necessarily be the same.
[28] See NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] 2 P & CR 9 at [44] (per Rimer LJ).
[29] See section 51 of the Registered Land Law (2018 Revision).
[30] By means of a claim for restitution of the overpayment.
11. Contact our team
Should you have any questions relating to this briefing, or you wish to discuss your legal concerns, please reach out to the briefing authors listed below:
William Jones
Partner
william.jones@ogier.com
Nathaniel Duckworth
Barrister - Falcon Chambers
clerks@falcon-chambers.com
Other Key Contacts
Cline Glidden
Senior Associate
cline.glidden@ogier.com
Sophie Warburton
Associate
sophie.warburton@ogier.com