COVID-19: The Impact on Commercial Leases- a guide for Landlords
Since the introduction of the Government’s ‘Stay at home, stay safe’ policy to tackle the Covid-19 pandemic, those of us who are able to work from home have done so. However, not everyone has this option, and many businesses have been forced to close, while others are suffering from the immediate financial damage caused by the loss of trade, the enforced change in our spending habits, and how we are currently obliged to live our lives.
With the introduction of the Coronavirus Act 2020 which came into force on 26 March 2020 (“the Coronavirus Act”) and the uncertainty created by the current economic hibernation, landlords and tenants will both be looking at their leases, and thinking about the steps they could to help preserve their business, look after the landlord and tenant relationship and address any immediate cashflow issues.
The following points may be of interest to Landlords of Commercial Properties:
- Rent and Remedies Available for Non-payment
The Coronavirus Act does not afford a Tenant a unilateral right not to pay the correct rent and at some point, the correct rent will become due/payable together with interest (if provided for within the lease). The tenant remains liable for their obligations under the lease unless the parties agree otherwise.
It is, however, encouraged that both landlords and tenants should look to find a compromise for the immediate future – whether that be to switch from quarterly to monthly rental payments; agreeing an immediate rent-free period; or some other adjustment. Parties should work together as best they can and approach negotiations with a degree of flexibility, especially given the gravity of the situation we find ourselves in which is being faced by the global business community.
Whilst a rarity, there are some leases in which the rents payable by the tenants are calculated either wholly or partly by the actual turnover received by the tenant’s business trading from a particular premise. Therefore, if a lease is based on a ‘turnover rent’ these landlords and tenants may wish to consider discussing a ‘rent holiday’, especially where the rent is based on several months’ historic trading or where there are deeming provisions which kick in if the premises are not being used.
The majority of commercial leases will include a forfeiture clause allowing the landlord to evict a tenant, re-enter the premises or simply change the locks if any rent is unpaid for a defined period. The Coronavirus Act contains express protection for business tenants, preventing landlords from evicting tenants for late payment of the quarter rent from 25 March 2020 until 30 June 2020 (called “the Covid–19 relevant period”). It may be that this inability to evict will be extended. This suspension will also relate to any service charge or insurance payments as well.
The suspension of the landlord’s remedy of forfeiture does not, as such, give the tenant a right not to pay the correct amount of rent and at some point, the rent will become payable together with interest (if provided for within the lease); the tenant is still liable for their obligations under the lease. Given that the landlord effectively has no recourse for non-payment however, there may be little the landlord can do in practical terms
In addition landlords should bear in mind that, any forfeiture proceeding which has been instigated prior to the Covid-19 relevant period will currently be delayed until 30 June 2020.
Whilst the Coronavirus Act has prohibited eviction for late payment it has not affected the other remedies for landlords in relation to unpaid rent. Therefore, if rent or other charges under the Lease remain unpaid or become unpaid, the Landlord might consider service of a statutory demand on the respective tenant requesting payment within 21 days of the demand’s date. In turn, if the particular tenant should fail to make payment within that timeframe or negotiate a new position with the landlord, the landlord is entitled to petition for the tenant’s bankruptcy or wind up the tenant company. From a practical perspective, this is quite a drastic route and how beneficial it would be for the Landlord is questionable, especially if the tenant is already financially disadvantaged. This particular route may be better suited therefore for tenants who are simply withholding funds, but caution is advised.
- Refrain from action
Understandably many landlords will be tempted to take steps against the tenant failing to comply with its obligations, especially with regards to rent and other payments. However, it may be better for landlords to consider the practicality of robust steps during this period. Legal issues aside, the commercial impact of such action on a landlord’s reputation, how steps will be implemented and how it will affect their future relationship with the tenant should also be taken into account. Landlords are unlikely to want to be in a position where they are burdened with vacant properties; not only does this lead to a lack of rental income it also places the responsibilities of the property ownership back on the landlords i.e. liability for business rates, payment of insurance premium without reimbursements and other costs of the property.
The prudent approach for the majority of landlords will be to consider working with their tenants through the months ahead to ensure that once we return to normal they are not left with empty properties. Landlords may also find that in providing the tenants with some leniency such as rent cessation, rent holidays or engaging in proactive communication with the tenants, it will lead to some tenants remaining loyal and to a good reputation. In turn this could then lead to negotiations concerning new or reversionary leases which extend the term of the current leases.
- Common Parts and Covid-19
Landlords will need to consider their obligations in relation to any common parts.. They should consider not only the responsibility placed on the tenants to sanitise and clean areas but also whether there is a responsibility to deep clean the common areas of the property. If landlords do consider it to be their responsibility, it is likely that under the terms of the lease, they will be able to ask the tenants to reimburse any payments of the costs incurred for the clean via the service charges. Landlords are encouraged to review their leases to ensure that they are aware of the terms.
If the landlord decides to close a centre of which a tenant’s premises is part of or any common parts, landlords will need to check their leases as to their obligations and the potential claims tenants could make against them. In addition, landlords should consider the position concerning service charge payments.
- Obligations within the Lease
It would be advisable for landlords to check their leases to confirm the requirements placed on them, even when their tenants are unable to operate, as landlords will still wish to ensure they continue to comply with any such obligations.
- Rent Reviews
There may be a rent review due. If the current rent sufficiently covers any overheads, landlords may consider deferring the rent review until we are in a healthier climate. It would be best to check whether the rent review clause in the lease states that “time is not of the essence” as this will mean that the landlord can carry out the rent review after the normal date. If the clause states that time is of the essence, or doesn’t mention it,, the landlord must carry out the rent review on the due date stated, or lose the right to review.
As many will recall, if there is a rent review and it is carried out after the usual rent review date, the tenant must pay the new rent from the date that the rent review was triggered and that any difference which applies following a delayed review will be payable immediately in arrears and often with interest.
For the majority of leases, the valuation of the rent will usually take place on the rent review date defined in the lease, so the landlord will need to consider the current market. This will mean that for rent reviews which are based on open market, or those that are RPI linked, that were to occur prior to the Coronavirus outbreak, the valuation will reflect the pre-Coronavirus position; therefore, those which are to occur during the Coronavirus outbreak will consider the position of the economy during the outbreak. This could substantially affect the reviewed, though most rent review clauses will be “upward only”.
Landlords should check their insurance policies to find out whether any losses due to Coronavirus are covered. This is not only in relation to building insurance (if they are liable for it) but they may also wish to check their general liability insurance, loss of rent policies, business interruption policy, crisis management insurance and mitigation insurance. It may be worth also speaking to the insurer.
Please note that this guidance note has been prepared as at 1 April 2020 and reflects the current guidance made available to us at this time. The situation with Covid-19 is particularly fluid, with a multitude of Government regulation and guidance made publicly available daily. We cannot guarantee the accuracy of the information as at the date you are reading the guidance and you should follow up on any matters of concern to check the current available guidance
Business, Commercial Property, General, George Ide, News