As COVID-19 continues to threaten the health of the population, its effects are also felt in various sectors of the economy including the real estate market. In dealing with the pandemic, various legal concerns have arisen leading to uncertainty among landlords and tenants. Below, we shall address a few of the concerns.
1. Does a claim for Force Majeure apply in a tenancy arrangement?
Force majeure clauses are put in place to ensure parties are relieved from fulfilling their obligations when certain circumstances, that are beyond their control, arise thereby making performance impossible. Landlords and tenants who seek to rely on this must:
- have the force majeure clause present in their agreement-Force majeure cannot be implied in a contract, it must be specifically provided in the contract;
- demonstrate that the event is specifically covered under the clause; and
- that the event is linked to the party’s inability to perform their obligation.
Implications of force majeure clauses on contractual obligations have been discussed by MMAN in other articles. You may find them here and here.
Currently, a bill has been proposed by the National Assembly to amend the Law of Contract Act, Cap 23 in relation to COVID-19. The amendment seeks to ‘renegotiate’ contract terms by providing that the COVID-19 pandemic be construed as a force majeure occurrence. It further provides that the following actions are prohibited where the pandemic has affected performance of contractual obligations related to tenancies and leases:
- commencement of levying of execution;
- enforcement of security over movable and immovable property used for trade purposes; or
- termination of lease or licence in connection with non-payment of rent or other monies.
Notably, the proposed amendment does not provide a mechanism for determining when a party ceases to be affected by the event. Therefore, the landlord may be unable to terminate the contract until expiry of the lease as the tenant can claim that they are still affected by the pandemic. While the proposed amendment cushions the tenant, the same does not offer reprieve to landlords. However, until the above is passed as law, parties are advised to review their force majeure clause to determine whether they can rely on it.
2. Can a claim of frustration of the tenancy /lease hold?
A claim for frustration arises where an unforeseen event occurs, without the fault of either party and renders the performance of the contractual obligation impossible or radically different from that which the parties contemplated while entering the contract. Notably, for a contract to be frustrated, the event must be central to the terms of the contract.
Should the government implement a total lock down directive, residential tenants may not be able to claim frustration as they would still be occupying the premises. On the other hand, commercial tenants, may argue that the lock down has hindered their ability to reach the premises to conduct business thereby frustrating their performance of the contract. The threshold to attain to invalidate a contract on the basis of frustration is very high. Frustration of tenancies on account of lockdown may hold in the immediate but is unlikely to affect the performance of the contract in the medium- and long-term view.
The downside of a tenant claiming that the contract has been terminated through frustration is that, devoid of a contract, the tenant would be compelled to vacate the premises. Failure to which, in law they either become a tenant at will or be obligated to pay rent. Unless a tenant is willing to immediately vacate the premises, this remedy may not be viable option.
3. What if the tenant is unable to pay rent as a result of the effects of COVID-19?
Since we cannot establish how long the effects of the virus will be felt by the economy, it is likely that several tenants will be unable to meet their rent payments. Tenants must remember that they cannot simply refuse to pay rent as this will be in breach of their contracts which may lead to termination. It is critical, at this stage that the parties initiate discussions on the available options to keep the contract alive.
Various options available to the parties include rent holidays, reduction of rent for a specified period, postponing of rent payment, establishing payment plans etc. The applicability of the options will be determined on a case-to-case basis dependent on a few factors including the type of tenant, business that the tenant operates and the overall relationship between the landlord and tenant. Once an agreement is reached, tenants should ensure that the same is reduced to writing and executed by both parties.
Tenants and landlords are also advised to assess their relevant insurance policies to confirm whether potential cover is available for business interruption or loss of rent in response to the virus.
4. What are the obligations of landlords and tenants regarding safety and reducing spread of the virus?
The obligations of the landlord and the tenant are governed by the terms of the lease. Generally, the landlord is responsible for the common areas of a property whereas the tenant is responsible for the leased premises. Therefore, each party must comply with all applicable laws and other government directives relating to health and safety.
It is also important to note that both parties are required to put in place measures to preserve the health, welfare and safety of any of their workers present at the premises pursuant to the Occupational Health and Safety Act, 2007. This requires parties to ensure that they adhere to the various guidelines as provided by the government through the Ministry of Health. With regards to occupier’s liability, occupiers should note that their liability remains the same i.e. an occupier is still expected to exercise their duty of care to visitors of the premises.
5. How should parties navigate the ‘keep-open’ clauses in a lease?
Most leases have a ‘keep-open’ clause. This requires the tenant to remain open and continue to operate their business in the leased premises for the duration of the lease. In case the tenant seeks to close their business premises, such clauses often provide that they notify the landlord and provide the necessary caretaking and security arrangements as required by the landlord and any insurers of the premises.
In case a tenant is seeking to operate their business remotely, it will be critical for the tenant to ensure that the provisions of this clause are complied with. In the event the government issues a lock down directive, such a directive will likely take precedence over the ‘keep-open’ covenant thereby preventing the landlord from enforcing the clause.
6. How is the current closure of the land registries expected to affect ongoing transactions?
Where leases had been executed and not registered, the obligations of the parties are not affected as an obligation is created on execution and not on registration.
In conclusion, please note that we are available to provide contract review services, expound further on these and other COVID – 19 related issues that may arise in the context of such transactions and provide the relevant legal advice.
Article by Christine Wambui
Lawyer (Banking and Finance) MMAN Advocates