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Critical lease clauses for commercial properties during and post COVID-19 era

CORRESPONDENT
Relief granted: Molapo Crossing is among a few malls that granted tenants relief
The contracting parties should not fall into the trap of presuming that any Force Majeure (FM) provisions are implied in the lease. For this reason the clause on FM should explicitly state what would constitute a FM event and go a step further to cover the rights and responsibilities of each party whenever a FM event is declared. Quite important here would be provisions for serving notice to either party, and strict adherence to these should not be viewed as optional. The language of the lease should be couched in such a way that it does not provide room for ambiguity that could easily lend itself to one of the parties unduly exploiting the other. There are three essential factors here; content, context and intent. PAUL BATSHEDI MORE writes

While scientists, epidemiologists and vaccinologists are toiling day and night around the globe, working their fingers to the bone for the benefit of humankind, the world has to keep moving. Almost everyone says that life will never be the same again post coronavirus (COVID-19) era. A disruption of an unforeseen magnitude has hit a good number of industries. Perhaps the hardest hit are; entertainment, finance, health, travel, transportation, petroleum, tourism, catering, retail and fine wine and dining.

Also hit, and badly so, is the real estate industry. Both lessors and lessees are bleeding money. The question is, how could each party meaningfully protect its interests going forward? This article suggests a restructuring of existing commercial leases to include clauses that would reasonably accommodate interests of both parties with a view to averting conflict and possible litigation.

Force Majeure; Gone are the days of drafting force majeure (FM) clauses in a perfunctory manner, almost like the terms captured therein are a product of the drafter’s wild and fertile imagination. A lot of thought has to go into what is captured, and this should fully encapsulate intentions of the two parties.

COVID-19 has demonstrated to the world that commercial property is not immune to the harrowing effects of epidemics and pandemics. Such unforeseen Acts of God could in the blink of an eye convert the most dependable and responsible tenant into a delinquent. In the circumstances, a FM clause would come in handy. What should that clause cover? Apart from the normal Acts of God we’re accustomed to such as natural disasters and incidents of unrest such as terrorism, wars, and riots, it is now clear that it should be broadened to cover even government orders, epidemics and pandemics.

All these fall within the scope of unforeseen or unforeseeable events. If you are a commercial lessee, and your clause on FM does not cover these events, this is the opportune time to demand amendment of your lease or to motivate for some extensive restructuring of the provisions captured therein.

However, it would be unwise to limit this clause to the aforementioned events only. It has to be expanded to cover all unforeseeable events falling outside the control of either party, which would naturally impede one or both parties from performing their contractual obligations as stipulated in the lease. The overarching objective of the FM clause would be to explicitly restrict either party from suing another for specific performance.

The overriding principle here would be equity, which would suggest the reasonable equalising of rights and liabilities on parties to a contract.

In their attempt to avoid loss of income, some lessors of commercial property have in the past succeeded in excluding rental payment from the FM clause. All discerning lessees should be on the lookout for this and make sure that they are adequately covered with provisions such as partial or full rental abatement. Perspectives of lessees and lessors are not normally aligned with respect to rental abatement.

The lessee would ordinarily want abatement to apply until such time that it is able to resume full operation, whereas the lessor would want to limit abatement to such time that the lessee could be reasonably expected to have resumed beneficial as opposed to full scale business operation.

From the lessor’s perspective, the period of suspension of business operations by the lessee would not always match a reasonable time frame for resuming operations. In other words, the lessor may hold the view that though the lessee has not yet resumed full business operations, all things considered, it should have, and the lessor should not be forced to mollycoddle a highly inefficient lessee.  

All lessees must appreciate that lessors are in the business of earning income through rental of property and would vehemently reject any notion for time being at large with regard to abatement of rental. They would

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therefore push for monthly reviews where an objective assessment of the lessees’ ability to resume business operations would be objectively performed. A give and take approach might be mutually acceptable, where for instance, owing to the lessors’ desire to avoid impairment of capital value of the property, it would agree to a rental abatement period that would match agreed extension of the current lease.

Say the occupation of the leased property was disrupted by a period of five months for which the lessee enjoyed abatement of rental, at the time the lease expires, the lease would be extended by a further period of five months. And for that duration all lease terms will apply, including rental payment. The contracting parties should not fall into the trap of presuming that any FM provisions are implied in the lease. For this reason the clause on FM should explicitly state what would constitute a FM event and go a step further to cover the rights and responsibilities of each party whenever a FM event is declared.

Quite important here would be provisions for serving notice to either party, and strict adherence to these should not be viewed as optional. The language of the lease should be couched in such a way that it does not provide room for ambiguity that could easily lend itself to one of the parties unduly exploiting the other.

There are three essential factors here; content, context and intent. And the drafter of the FM clause should have a good grasp of all these factors from the perspectives of both parties.

Ultimately, any provisions captured in the FM clause have to address the burden of risk of loss. In so doing, it would ordinarily answer the following key question; would the premises be fit for purpose, specifically with regard to allowed use? Where it is assessed that the FM event has rendered the property unfit for use, the FM clause would come in very handy, as it would unambiguously stipulate how both parties would bear the burden of loss. Levelheadedness is required here since a heavily one-sided FM clause would only contribute toward ruining what would otherwise have been a good relationship. 

FM clause may also cover potential for termination of the lease, especially in cases where possibility of resumption of business operations after a FM event is nil or next to nil, or where the balance of the unexpired term of the lease is so short that it is mutually agreeable to both parties to push for early termination of the lease.

Quiet Enjoyment of premises (peculiar to COVID -19 or similar epidemics and pandemics); Although the clause on quiet enjoyment of leased premises would naturally apply, it might be necessary for the lessor in some cases to interrupt quiet enjoyment of the property owing to the need to ensure that the lessee complies with all government ordinances relating to the wider good of public health. In the interest of avoiding potential conflict and litigation, it would be helpful if this is unambiguously captured in the lease.

However, in cases where the lease does not explicitly cover this, lessors are advised to invoke legal guidance before disturbing the lessees’ right to exclusive possession of leased premises. Business Interruption; From an insurance perspective, it would be optional for parties to have a clause covering insurance in the event of business interruption. However as a matter of good practice, it would be prudent for both parties to have in place insurance policies that would adequately cover them in the event of their businesses being interrupted by epidemics, pandemics, public emergencies, unrest and government mandated lockdowns. This type of policy would ordinarily be over and above the one that would normally cover physical damage to property.

PAUL BATSHEDI MORE *

*Paul Batshedi More is a motivational speaker and property specialist



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