With a public notice titled “All goods things must come to an end”, management announced that “Coco Lounge, Urban Grill and Carbon are closing their doors for the last time as of today, 28th March 2021” – bringing fine dining, world-class entertainment experience and established brands to a surprising end.
Predictably, the impacts of Covid-19 could be a decisive factor in such an announcement – as footfall to such business venues had significantly reduced following the coronavirus control measures. Whilst these brands/businesses may not have experienced isolated Covid-19 circumstances, they however uniquely operated from a high-end commercial property located in Airport City implying a unique operational cost on rent.
Similarly, their occupation would have been regulated just like all tenants in commercial properties by commercial leases (tenancy agreements). The rent rates for these properties are oftentimes regarded as excessively high constituting high unit costs in the finances of such businesses. Maintaining occupancy during periods like the Covid-19 pandemic with changing business formats and declining revenues may have led to the accumulation of unsustainable rent liabilities and the decision among others to close shops for many such occupants.
This article takes a look at the concept of commercial leases, rent liabilities and the effects of Covid-19 on businesses operating from commercial properties and identifies some lessons for future commercial leases.
COMMERCIAL LEASES AND RENT LIABILITIES
By the coming into force of the Real Estate Agency Act, 2020 (Act 1047), a tenancy for more than a year is deemed a lease. According to Da Rocha and Lodoh leading Ghanaian authorities on land law, a lease simply is “…a document in writing by which an interest in land is transferred”. However, the interest (exclusive possession, occupation and use) created must be for a fixed period at a rent (price) to be deemed a lease.
The term “commercial lease” has become a term of art for a lease whose purpose is for commercial activities than residential ones – operating in respect of a property built for commercial purposes.
Ordinarily, a commercial lease is an agreement between a commercial property owner and a tenant over the use of a demarcated space (or full use of property) within a commercial property on terms including purpose, payment of rent etc. This means that the occupants of the various commercial properties including malls, office building etc execute this type of agreement to regulate their occupancy – what in ordinary parlance we call “tenancy agreement”.
The name “commercial lease” is not suggestive of the strict adaptation of the exact precedents of a usual lease – it is accommodating of expansive terms as may be agreed between the parties regarding the use of the commercial space.
These agreements are executed with a “purpose” – as office space, retail shops, restaurants etc as the case may be. The tenant (occupant) only tenders rent for the use of the commercial space (for the purpose) and observation of other terms (covenants) agreed between the parties.
Arguably, the “purpose” is the most important consideration why the parties will have a lease agreement – without which the tenant will not have contracted with the property owner. Therefore, any disruption to the continuous undertaking of the “purpose” should be of critical consideration for the continuation of the lease or otherwise – especially where the resulting circumstances are unforeseeable, extraordinary and unpredictable.
In accordance with industry practice, these leases are executed for five (5) to ten (10) year periods. The tenure and (high) rent associated with a commercial lease mean businesses could only continue occupation on sound returns analysis – it will not be financially prudent to continue occupation in circumstances of disruption to the “purpose" – the pursuit which results in value generation.
However, a negative financial position (resulting from no or low revenue generation from the use of the property) will not excuse a tenant from rent liabilities under normal circumstances. A waiver of contractual obligations including rent liability during the tenure of a lease could only be allowed under permissible circumstances of law following the occurrence of some events. It is in this context that this article examines the effects of the common law doctrine of frustration and a force majeure clause on commercial leases during the Covid-19 pandemic and its lessons for future lease agreements.
THE COVID-19 PANDEMIC – AN EXTRAORDINARY EXPERIENCE
The impacts of the Covid-19 pandemic are common knowledge. It has affected all aspects of our lives mostly in negative ways however creating new opportunities for technology-led and new online business models.
At its worse, drastic unseen before measures were taken globally by governments to contain its impact on lives and businesses. Like any virus that spreads with human contacts, mandatory social engagement restrictions were legislated and implemented. The resultant measures were mandatory wearing of nose masks, the practice of social distance, lockdowns (stay at home orders), restriction on the operation of certain types of businesses and social gathering activities among others.
These extraordinary measures although necessary had resulted in new ways of life and work moving people from “bricks and mortar” daily experiences to online – work from home and stay at home lifestyles. Unprecedented is the closure and operation under strict social distancing and other preventive protocols of many businesses that depend on direct footfall like restaurants and eateries, lounges, pubs and night clubs (some of which remain closed to date) – and these categories of businesses are mainly the occupants of the many commercial properties in town.
Covid-19 dipped and wiped-out revenues but kept rents running through its wrecking moments. The purpose for many commercial leases became pointless – due to various government's coronavirus control interventions such as restrictions legislations. For instance, a commercial space leased for a restaurant, eatery, pub, etc could not be opened and operated during the peak of the outbreak. Simply, the purposes of these commercial leases were frustrated by these legislations and became pointless – worthless.
Businesses did not anticipate this pandemic – as the last time a pandemic of this scale happened was in 1918. The occurrence of this unforeseeable “monster” meant businesses were not prepared operationally and legally to deal with its immediate effects – and many did not survive it and had to fold up.
Conclusively, the Covid-19 pandemic has been an extraordinary supervening, unpredictable and unforeseen occurrence never anticipated by any contracting party before its outbreak.
PERFORMANCE OF CONTRACTUAL OBLIGATIONS DURING COVID-19
With the outbreak of Covid-19 and with its real and estimated impacts, businesses begun making adjustments to their operations. Strategies were adopted to minimise its effects on top and bottom lines – by implication the adoption of cost-saving measures, especially for non-essentials and pointless investments.
Commercial spaces became non-essential and not fit for purpose for many businesses as they had moved their operations from offline to online due to exigencies of the times and the coronavirus control measures.
However, because commercial leases impose legal obligations, their performance could not be ignored without considerations within the context of agreements and law generally. In such review exercises, an understanding of the common law doctrine of frustration and the effect of a force majeure clause is relevant for any attempt to excuse businesses from or terminate their contractual obligations.
Covid-19 succeeded in creating supervening circumstances which made it impossible and pointless to carry out any contractual obligations under commercial leases especially by tenants. How the doctrine of frustration and a force majeure clause could have helped the related businesses is discussed below:
The Doctrine of Frustration
The doctrine of frustration is not backed by any specific legislation – it is a common-law doctrine. Its applicability in Ghana is therefore derived from the constitutional acknowledgement of common law as a source of law in Ghana – although rarely invoked with a successful. It is invoked when an unforeseen, unpredictable and extraordinary event occurs to completely undermine the purpose of a contract – in a manner not provided for by a force majeure clause in an agreement.
In essence, where the purpose of a contract is frustrated by an extraordinary event like Covid-19 did with strict governmental control interventions - restriction legislations, lockdown, close operation orders etc, the doctrine of frustration could be relied upon to discharge parties from commercial lease contractual obligations. Yet, any such claim will not succeed on the impossibility of the performance of contractual obligations like the payment of rent but the contract becoming pointless – contract losing its value (the purpose).
The legal threshold for the reliance on this doctrine is however very high with its developed principles. A successful proof that the contract has been frustrated would lead to an automatic discharge from contractual obligations.
A Force Majeure Clause
Circumstances that may give rise to the claim of frustration could be the same regarding the activation of a force majeure clause. However, there is no legal presumption in favour of a force majeure clause unless it is present in a contract. Further, it takes no standard form and is drafted to the specific circumstances of a contract and per the agreement of the parties.
Although it is part of most commercial agreements, the parties must have defined circumstances which they deemed as a force majeure event and include it in their contract before it will be activated – events that will impact their obligations and make the performance of their obligations impossible.
The normal reference to an act of God, an act of government or national emergency in most force majeure clauses could have given rise to the justification of the outbreak of Covid-19 as a force majeure event. On a successful proof, a force majeure clause excuses parties from contractual obligations and liabilities – but does not automatically discharge them. Its existence in pre-Covid-19 commercial leases may have offered some opportunities for renegotiation of rent obligations, deferred payments, or suspension of rent among others.
As it is the parties who predetermine its scope and definition, there is the freedom to include an expansive possibility of supervening events that could make the performance of contractual obligations impossible.
SOME LESSONS FOR FUTURE COMMERCIAL LEASES
Drastic changes are expected in the negotiation, drafting and execution of commercial leases going forward. Largely, this is due to how Covid-19 has changed our ways of work and life – making commercial leases for some types of businesses and work worthless.
The new trends of “Working from Home” (WFH), e-commerce and home delivery technologies are here to dominate our lives. Therefore, the first step is for commercial property owners to review rents to competitive rates, improve service delivery – such as the provision of superior internet infrastructure, flexible payment arrangements, virtual office concepts etc to retain and possibly attract new tenants.
These considerations must influence their negotiation stances with occupants and potential tenants informed relax and flexible rules on obligation enforcements such as payment of rent among others. Further, the scope of force majeure clauses of commercial leases must be expanded to anticipate even if not accurately but future pandemics or such events that may bring about business disruptions. A business-to-business negotiation on such clauses will help support occupants to adjust in extraordinary circumstances whilst honouring their contractual obligations.
Lack of adjustment to the pre-Covid-19 commercial property leasing and obligation enforcement will see many commercial properties unoccupied and empty now and post-Covid-19 – as many businesses are perfecting their resilience strategies to survive without “bricks and mortar” offices and place of business.
Businesses have learnt too many lessons from the outbreak of Covid-19. A critical lesson is to increase investments into technology to support online delivery of service than from a fixed venue. With emerging 3rd waves in some countries, the impacts of Covid-19 in the short to mid-term will continue despite the ongoing vaccination programs.
Therefore, commercial property owners must appreciate that they will be experiencing more empty and unoccupied spaces. Businesses will close shops resulting in loss of revenue for property owners. To save the little left of the industry, owners will respond in ways that encourage current occupants to maintain their occupancy and attract new tenants. This advice cannot be ignored and the current circumstance – the Covid-19 pandemic demands a new approach to commercial lease negotiation, drafting and obligation enforcements.
The author is Richard Nunekpeku, a lawyer and reachable at [email protected]