Commercial Property and Coronavirus - advice for landlords and tenants
The spread of Covid-19 has forced the abrupt closures of shops, restaurants, cafés and other businesses across the UK. Here we give some general advice to local commercial landlords and tenants on their options.
Our commercial property lawyers are currently working from home and will be pleased to advise you. Please email us as normal. If you wish to telephone one of our solicitors click through to their profile page to find their direct dial telephone number.
Advice for landlords
Your tenant cannot pay their rent. They ask you if they can defer their rent during this uncertain period. On a personal level, you naturally want to help but you are concerned as to how long you should reasonably defer rent for and how this can be agreed in such a way which does not give the tenant the impression that you are forgoing the rent you have kindly deferred and waiving any right you have to determine the lease further down the line should this become necessary. What are your options?
If you are willing to offer some form of concession to your tenant, whether it is a switch from quarterly to monthly rent payments, a full blown rent free period or an agreement to pay a reduced rent, it is very important that the arrangement is clearly documented in writing. A Deed of Variation should only be used if it is intended for the arrangement to be permanent. A Side Letter is preferable for landlords as, provided it is expressed to be “personal”, the revised rent arrangement will not formally become part of the lease and will therefore not pass to future tenants. You should however seek advice from a solicitor to ensure this is drafted correctly and in a way which does not prejudice you later on.
You need to give consideration to and document the following: what the change in the rent will be; how long this change is to endure (if this is not for a fixed period, what notice must be given to the tenant to terminate the arrangement), and; when you expect the deferred rent to be paid by, i.e. on top of normal rent payments or by a fixed date.
You could agree with the tenant that the amount of deferred rent will be taken from any rent deposit you hold however bear in mind that in doing so, you may waive any right to forfeit the lease further down the line (note that s82 Coronavirus Act 2020 has banned any forfeitures for non-payment of rent up to 30th June – the government reserves the right to extend this).
You should also check your insurance as some leases may provide for suspension of rent in the event of an uninsured risk. Depending upon the definition of “uninsured risk” in the lease, you may be obliged to provide a rent suspension. Where this is the case, you should review your loss of rent insurance.
You should also ask the tenant to review their own business interruption insurance to ascertain whether they can recover some of their rent through that.
If, once the government’s moratorium on commercial lease forfeitures has expired, you find the tenant has not resumed normal rental payments, nor are they likely to be in a position to do so in the short to medium-term future (remember it is going to take a while for businesses to get back on their feet) then you can of course consider: forfeiture; serving a statutory demand on the tenant, and; going down the commercial rent arrears procedure. However be aware that there are probably not many landlords who will see forfeiting their tenant’s lease as particularly attractive as even when life does return to some form of “normality”, the commercial lease market is likely to be extremely quiet and so there is no certainty you would find another tenant quickly. Therefore provided the tenant has hitherto been a good tenant, you would be well advised to try to work with the tenant for as long as you feasibly can or else risk being left with an empty property on which you will end up paying rates and bills and which in these times you may well struggle to re-let in a hurry. Prospective tenants are likely to be in very short supply!
Advice for Tenants
You, along with thousands of other tenants, cannot pay your rent through no fault of your own. You do not know when you will be able to resume trading again and even when you can, you do not know what state your business will be in and when you will be able to resume paying rent. What are your options?
- Rent Deferment/Reduction – Most landlords are going to be very reluctant to lose their tenants as, in the present climate, there is likely to be a shortage of prospective tenants! Therefore your landlord may well be amenable to coming to an agreement on rent if they feel this would help you in the long-run. Options range from asking for a switch from quarterly to monthly rent payments to a complete rent-free period for at least the next three months or an agreement to pay a reduced rent. Remember that most commercial leases provide for rent to be payable “without deduction” so it is important that you come to an arrangement with your landlord first before reducing or stopping any rent payments. It is worth bearing in mind that if no agreement can be reached as regards rent deferment or reduced rent then s82 Coronavirus Act 2020 has banned any forfeitures of commercial leases for non-payment of rent up to 30th June* (see the end of this article) – the government of course reserves the right to extend this timeframe. If you are unlikely to be able to pay rent in the short-term, this protection should provide a small bit of relief in the immediate future.
- Surrender, assignment or subletting – You could of course consider surrendering your lease, i.e. offering your lease back to the landlord. The landlord does not have to agree to this and may well charge you a surrender premium if they did. You would of course lose your business premises and so would have nowhere to trade from when things get up and running again. If this is not possible then you could possibly look to assign or sublet your lease. However, you will need to check your lease first to check whether these options are allowed and what conditions there are. Bear in mind also that prospective tenants/sub-tenants are likely to be in short supply at the moment.
- Break option – First things first, check your lease to see if you have a timely break clause. If you are lucky enough to have a break clause then check the conditions in it very carefully to see when it is that the break clause can be exercised – most break clauses can only be exercised in specific years. If you do have a break clause which you would like to exercise then take advice from a solicitor as compliance with the conditions in the break clause is very strict.
- Get out clause – If there is no break clause then check whether the lease contains any provision enabling you to cease paying rent or walk away in certain circumstances. The present situation is unlikely to have been catered for in most modern leases but you never know!
- Check insurance provisions – Ask the landlord to check their insurance policy as some leases may provide for a suspension of rent in the event of an “uninsured risk”. Depending of course upon the definition of uninsured risk, the landlord may be obliged to suspend rent in which case the landlord can recover this from their insurer. You should also check your own business interruption insurance to ascertain whether you can recover some of your rent.
- Force Majeure – It is very unusual for a lease to include a force majeure provision that would allow you to terminate the lease but again, it is worth checking nonetheless.
If you are in any doubt as to the terms of your lease and your options then please contact a solicitor who can discuss possible ways forward with you.
* Please note that not all commercial leases are covered by this protection and we therefore recommend that you speak with a solicitor to check whether your lease is covered.