The World Health Organization classified the outbreak of COVID-19 as a pandemic on 11 March 2020. The Hong Kong Government has been implementing a series of control measures, including travel and border restrictions and compulsory quarantine for 14 days, to curtail the number of infections and combat the ongoing outbreak. As a consequence, business disruptions with a reduced need for office and shop spaces, and a significant and abrupt business slowdown affect a lot of business tenants in Hong Kong.
The key issues for a business tenant to consider are whether in an outbreak a tenant can use that as a ground to early terminate the tenancy agreement or request for a rent abatement until the situation gets better. This article will focus on the application of force majeure clauses and the doctrine of frustration with regards to the possible early tenancy termination and rent abatements.
Early termination of a tenancy agreement
Can a tenancy agreement be terminated if there is a force majeure clause?
A force majeure clause is a clause that excuses a party from performing part or whole of a contract, or entitles the party to suspend or extend the time for performance, upon the occurrence of an event that is out of the party's control.
In the context of tenancy agreements, the effect of exercising a force majeure clause may include a right of early termination of the tenancy agreement in extreme events, or of suspension of rent or part thereof.
For a force majeure clause to operate, a downturn in economic conditions and/or market circumstances will generally not be regarded as force majeure events (Thames Valley Power v Total Gas & Power  EWHC 2208 (Comm)). Similarly, performance of contractual obligations must be "physically or legally impossible, not merely more difficult or unprofitable" (Tandrin Aviation Holdings Ltd v Aero Toy Store LLC  EWHC 40 (Comm)).
Whether or not a party could invoke such a clause in light of the COVID-19 outbreak depends on the construction of such clause and the facts. Relevant considerations include, among other things:
(1) the terms and scope of the force majeure clause, e.g. whether such clause expressly covers public health emergencies, epidemic, pandemic or generally events that are outside the parties' control;
(2) any requirements on proof, e.g. a certificate issued by an authority confirming that there had been a force majeure event;
(3) whether the parties are under obligations to mitigate; and
(4) whether the parties are excused from the performance or merely suspended from the performance for a specified time?
Can a tenancy agreement be terminated by frustration as a result of COVID-19?
In the absence of a force majeure clause or the wording of a force majeure clause does not cover COVID-19, the next question is if the tenancy agreement could be frustrated and accordingly could be brought to an end.
In a 2009 SARS epidemic-related case Li Ching Wing v Xuan Yi Xiong  1 HKLRD 761, the court rejected the tenant's claim that a two-year fixed term tenancy agreement was frustrated by the making of the isolation order by the Department of Health and the premises thereof could not be inhabited for 10 days. The court held that a 10-day period was insignificant in terms of the tenancy agreement's overall use, as well as whilst the outbreak of SARS might arguably be an unforeseeable event, it did not "significantly change the nature of the outstanding contractual rights or obligations" of the parties.
In this connection, it was held in Time Rich 08 Ltd v DBE (HK) Ltd  HKCA 404 that for the doctrine of frustration to apply, and the premises must be so severely damaged as to be rendered unfit for use, not merely dilapidated and in need of repair. As such, whilst the COVID-19 outbreak is beyond the control of the parties and causes severe business disruption and hardship to the tenant, if the premises is still accessible and not unfit for use, it would be difficult to invoke frustration as a ground to terminate the tenancy.
Rent abatement or reduction
Whether or not a tenant is entitled to rent abatement or reduction depends on whether there is a rent suspension clause or a clause that allows a rental reduction in the tenancy agreement. However, similar to the application of a force majeure clause, if the wordings of the clause do not extend to cover COVID-19, it is unlikely that a tenant would be able to rely on any contractual recourse to seek rent reductions.
A viable option for tenants would be for them to take a collaborative approach with their landlords to negotiate rent abatements or reductions to address the business disruptions caused by the COVID-19 outbreak. After all, the uncertainty and cost associated with terminating a tenancy agreement and procuring a new tenant could be higher for the landlords.
As it stands at present, in a global pandemic such as the current COVID-19 outbreak, there is limited recourse for the tenant to seek early termination or concessions under their tenancy agreements. First, it seems unlikely that COVID-19 will fall within a force majeure clause drafted in general terms and without express wording as it is arguably not a foreseeable event. Secondly, there is limited application of the doctrine of frustration and Hong Kong case law so far has not been on the side of tenants who tried to argue that public health crisis situation with dire economic and business disruption impact such as SARS should be a good ground for termination of a tenancy agreement. As a practical matter, tenants may negotiate with their landlords to reach a new arrangement such as a rent abatement in light of the business reality. Tenants could also consider insuring such risks against the next pandemic outbreak.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.