Commercial Lease Issues & Covid-19
As the government guidance on the coronavirus continues to evolve this blog addresses some of the difficulties facing landlords and tenants.
It is important that parties remember that business interruption for a tenant means business interruption for a landlord and it is imperative that parties conduct themselves reasonably when attempting to resolve any issues may arise.
On 23 March 2020 the UK took steps to close businesses and public spaces and to stop gatherings of more than two people in public. The overwhelming message was to stay at home where possible. At the time of writing these measures are subject rolling three-week review.
What does this mean for LANDLORDS and TENANTS of business premises?
Should tenants still pay the rent?
What can landlords do about recovering unpaid rent?
Most of the existing rights and remedies available to both landlords and tenants are in a state of flux. The legal landscape is changing almost daily. Law is usually reactive; many questions arising now will not be finally determined unless and until they are decided in Court, when judges have the opportunity to interpret the new legislation which is being rolled out now in extreme circumstances.
Forfeiture and Rent Suspension
Most commercial leases do not allow tenants to withhold rent for any reason. Non-payment of rent would usually trigger a landlord’s right to forfeit the lease (although ‘relief’ is a tenant remedy available in some circumstances through the courts)
The Coronavirus Act 2020 suspended a landlord’s ability to take forfeiture action for business tenancies, more of which can be read about here.
It is important to remember that these provisions only suspend the landlord’s ability to terminate the lease. There is no automatic rent holiday – rent still remains due and is probably accruing interest too. So far, landlords have not been specifically prevented from using other more aggressive remedies to pursue tenant debts such as:
- the Commercial Rent Arrears Recovery procedure (CRAR)
- issuing statutory demands or winding-up petitions
Threats to household name tenants by their landlords are regularly making the national news.
Fortunately for tenants, the government has taken a firm stance on this issue and announced that secondary legislation will be enacted in June so that statutory demands and winding up petitions issued to commercial tenants will be temporarily voided. We also anticipate changes to the use of Commercial Rent Arrears Recovery. The new legislation to protect tenants is expected to come into force in June with a provisional end date of 30 June, although that date can be extended in line with the moratorium on commercial lease forfeiture.
The law here is still very fluid and announcements from the Government change the legal landscape quickly, so up to date, detailed professional advice is a must. It’s clear that the intention is to strike a balance between being generous and supportive to commercial tenants, while acknowledging the debts due to landlords. Landlords often have upwards costs such as bank loans and service costs which they are obliged to meet.
Rent Concessions
Despite the various protections for tenants discussed above, the government is not ignorant to the plight of commercial landlords and is encouraging tenants to pay rent or part-rent insofar as they are able. Several tenants are attempting to reach rent concession agreements with landlords so that parties can share the risk and the burden of the current uncertain times.
Rent concession agreements are a solution that we are recommending to both landlord and tenant clients, but it should be noted that landlords are under no obligation to enter into any agreement – in fact we recognize that it may be a commercial necessity that they continue to insist on full rent.
It is important that parties are open with each other and communicate clearly and co-operatively to try and reach a compromise.
Keep-Open Covenants
Some leases, usually within retail settings, contain a “keep-open clause”, obliging a tenant to keep the premises open for trade at specific times. It is possible that disputes may arise between partiers due to the evolving nature of government guidance, but it is very unlikely that where a tenant has closed in order to comply with the law or government guidance, this will override any ‘keep-open’ obligation. The historic position is that only in the most exceptional cases will the courts enforce keep-open covenants by ordering specific performance.
Derogation From Grant
In some instances, landlords have taken the decision to close business premises and thus have prevented tenants from keeping open, even where they would otherwise be able to. For example, a food retailer within a market setting may not be able to open their premises due to the entire market being closed. Here, landlords may be concerned about potential claims for ‘derogation from grant’. This claim by a tenant relates to the landlord covenant for ‘quiet enjoyment’, which gives the tenant the right to use the property without interruption by the landlord. Landlords may well argue that current government guidance means that closure of premises is ‘reasonable’ which would likely be a sufficient defense, meaning they would not need to compensate out-of-pocket tenants.
Of course, for a landlord who has imposed closure of the premises on an unwilling tenant, any action by the same landlord for recovery of rent arrears is highly unlikely to succeed.
Compliance With Laws
Most commercial leases contain a tenant covenant to comply with all statutes, notices and orders made by relevant authorities. For COVID-19 this means that tenants could find themselves in breach of the terms of their lease if they fail to comply with current government guidance, maybe by obliging non-essential staff to come to work.
Insurance
An industry-standard ‘FRI’ lease will require a tenant to reimburse the landlord’s costs for insuring the property against certain risks. In some cases, the risks may be wide enough to cover the coronavirus pandemic, although time, legislation and litigation will decide the extent to which the costs of the pandemic are picked up by the insurance industry.
The insurance provisions in a commercial lease usually entitle the tenant to a rent suspension where the premise are rendered unfit for use due to an insured risk. It is important to check both the lease and the insurance policy to establish whether this is relevant to a particular situation.
Many building insurance policies and therefore leases require that the property cannot be left unoccupied for too long; so tenants should check their obligation to comply with the terms of the landlord’s insurance and ensure that where possible suitable arrangements to preserve the security and maintenance of the property are in place. Again, communication is vital as the tenant will usually be liable for any losses that the landlord suffers.
Landlords Rights To Recover Increased Service Costs
At present, commercial landlords are not specifically required to provide additional services to slow the spread of the coronavirus. We have found that, commendably, many responsible landlords are doing so, for example through enhanced sanitization of common parts. Some shops are choosing to provide sanitization on entry. Conversely, you may have seen BBC reports of airlines operating almost entirely as usual, sparking outrage.
Where a landlord does provide additional cleaning services, this will mean increased costs. It is important for parties to ensure that they have a thorough grasp of any service charge provisions, to see who will meet those additional costs, and when. Most office and business premises leases will include provisions means that the landlord can recover reasonable costs “within the principles of good estate management”.
What About New Leases?
New leases which we are working on now for landlords and tenants are incorporating specific provisions relating to the pandemic. A popular request among tenants is that the lease should clearly state any rent suspension or rent concession arrangements from the outset. So, where the tenant’s negotiating position is stronger than the landlords, tenants are asking for leases to specify that if at any point in the future they cannot use the premises due to pandemic-related government measures, the rent will either be frozen or reduced automatically.
Whether or not such provisions are agreed now depends almost entirely on the relative bargaining power of the parties. While a degree of certainty may be comforting in these uncertain times, there’s always a risk that the terms agreed now may not suit the parties further down the line. There are always future risks to be considered and managed.
While there is no obligation on either landlord or tenant to vary from the terms of an agreed lease, where there is a willingness to change the terms of the lease after the event, this can do this relatively easily by agreement. Any agreement between and landlord and tenant which varies a written lease ought to be documented by a formal Deed of Variation which is something we can do for you relatively quickly and cheaply to help protect both parties from future disputes.
If you are a landlord or tenant and have questions about commercial lease issues either during Covid-19 or in general, please do get in touch on freephone 0800 011 6666 or by email at nikola.guthrie@timms-law.com or matt.rice@timms-law.com.
7th May 2020
Nikola Guthrie
Matthew Rice
Matthew Light