The situation for commercial landlords has not been good in recent times with more and more units on the high street being left unoccupied and tenants seeking rent free periods in a battle for survival.
The shockwave of COVID-19 has created even further challenges for landlords, especially after the Prime Minister’s statement of 23 March 2020 stating only essential businesses and premises are permitted to remain open. Numerous commercial premises up and down the Country are not being occupied as a result.
Below are some common areas of concern.
Ending lease earlier/rent suspension
- No doubt many tenants will want to end their commercial leases and simply walk away arguing the current pandemic amounts to a force majeure event and that the parties are prevented from performing their obligations under the lease. Whether they can depends upon what exactly the lease says and generally force majeure clauses in commercial leases are rare. Commercial landlords and tenants therefore need to seek professional and specific advice on force majeure, frustration and contractual performance as every lease needs to be closely scrutinised.
- Often a lease will contain a ‘keep open’ clause, giving the landlord a right to claim damages should the premises close. Generally though the clause would allow the premises to close where required by law.
- Leases normally only make provision for the suspension of rent if the premises are damaged, destroyed or are unusable due to an insured risk. In other words it is extremely unlikely that the impact of COVID-19 gives the tenant an automatic right to stop paying the rent unless the lease specifically refers to pandemics. Obviously though it is important for landlords and their tenants to communicate with one another and to consider the options.
- Insurance cover may potentially be available but generally standard commercial property insurance is usually triggered by physical loss or damage, rather than business interruption caused by pandemics. Policies of insurance need to be checked carefully to see if any losses/costs can be recovered.
Period of protection for tenants
- Section 82 of the Coronavirus Act 2020, which came into force on 25th March 2020, introduces some protective short term measures for tenants. As a result no business in the immediate term will be forced out of their premises because they are unable to pay the rent. Landlords are as a result not able to exercise any right of forfeiture on tenants that cannot pay their rent and this protection is due to lasts from 26th March 2020 until 30th June 2020. This date could of course be extended.
- Whilst the protection is no doubt welcome for many tenants it does not wipe out their liability to pay the rent after the protective period ends. If the tenant is not trading from the premises and thereby not receiving any income it is difficult to see how it is expected to pick up the arrears later on. The protection may be nothing other than a case of delaying the inevitable.
- Further, there is nothing to stop landlords taking steps now to recover the rent from tenants and any personal guarantors. It has been widely reported in the media that many tenants have been on the receiving end of statutory demands seeking to wind up their businesses, or bankrupt individuals.
- At present it is not clear if these suspension provisions apply to those in occupation of business premises under a licence, commercial contract or other arrangement.
Obtaining possession of premises
- The protection introduced by Section 82 covers any attempt now to obtain both physical re-entry and to obtain possession through Court proceedings.
- In respect of possession proceedings commenced before 26th March 2020, any Orders for possession already made cannot be enforced until after 30th June 2020. Further, in respect of any ongoing possession proceedings the Courts are not able to fix possession dates until after 30th June 2020.
- The concept of ‘waiver’ is severely curtailed during the relevant period. Only an express waiver in writing would be the only conduct by a Landlord regarded as waiving the right to forfeit the lease.
- There is no restriction on forfeiting commercial leases for breaches other than the non-payment of rent, or on other remedies which may be available to a landlord.
- Failure to pay rent during the protected is to be disregarded for the purposes of determining whether there has been a persistent delay in paying rent. This is respect of establishing if ground (b) of Section 30 of the Landlord and Tenant 1954 Act has been established should a landlord seek to oppose the grant of a new tenancy following an application to the Court.
Costs and the provision of services
- Landlords generally have responsibility to the extent that they exercise control over parts of the premises and their ability to implement measures. If for example a landlord has granted a lease of the whole building it is unlikely to have an ongoing responsibility for maintenance and the provision of services, including cleaning. If though the landlord has granted a lease of just a floor in a building to a tenant then it is likely to have ongoing responsibilities with regard to the provision of services with regard to the common parts, lifts etc.
- Some related costs to the current pandemic (for example deep cleaning the common parts and implementing more intense cleaning regimes) may be recoverable as part of good estate management but again this depends upon the wording in the lease and potential barriers, or limits to recovery.
- In respect of new leases to be drafted it obviously makes sense for both commercial landlords and tenants to agree and incorporate specific provisions that relate to pandemics generally. Specific clauses covering rent suspension due to pandemics, provision of hygiene services, service charge provisions to cover cleaning costs and additional clauses giving rise to termination could be included.
- Should working from home become more widespread then tenants will be seeking to downsize their office space, enhanced IT infrastructure and office layouts more amenable to ‘hot desking’.
In summary, this is a good time for landlords and tenants to discuss and review their obligations to one another and consider acceptable concessions. In respect of any agreements reached these of course need to be carefully documented and advice sought.