The UK Government is relatively reluctant to legislate in the commercial real estate arena but in these unprecedented times the Coronavirus Act 2020 (25 March 2020) does contain measures that impact on commercial real estate. However, the provisions are arguably reactive and limited and parties will need to work together to avoid vacant premises becoming the norm.
The Coronavirus Act 2020
The sole focus of the Act in relation to commercial property is to protect tenants from landlords exercising their rights of re-entry or forfeiture on the grounds of non-payment of rent but this suspension of forfeiture is only until 30 June 2020. To assist landlords the provisions are limited to the extent that they only apply to non-payment of rent. Landlords therefore retain the right of forfeiture for other breaches. Further the Act does not restrict a landlord’s ability to recover interest and costs, whilst restricting any implied waiver of a breach by the landlord.
In theory Courts could make an order for possession but that order cannot take effect until after 30 June 2020. There is a backlog in the Courts (and this has been the case since before the COVID-19 crisis began) and therefore it seems unlikely that a claim would be dealt with before 30 June 2020 even if a landlord made a claim now.
Current issues for landlords: Market insight
Given the real prospect of wide-spread forfeitures we are seeing that virtually all landlords are being responsive to tenant requests for help.
In the short time since ‘lock down’ the emerging trend is for two types of approach. Reduced or waived rents are commonplace where the tenant is from the entertainment or travel sectors, particularly with landlords having large retail portfolios.
Otherwise, as mentioned in more detail below, paying monthly or rent deferrals are generally available. However, unless the tenant can demonstrate a real risk of bankruptcy landlords so far are unwilling to grant non-recoverable rental holidays.
With new lettings most deals involving SmE’s are on hold or have ceased and of those on hold there is a risk that they will not progress if there is not a relatively early return to work.
With larger occupiers looking medium to long term there is still some sign of activity, but in virtually all cases longer rent free periods or lease deferrals linked to the lifting of restrictions are being negotiated.
Where Covid 19 clauses apply they are usually extended to fitting out as well as beneficial occupation – while a fair proportion of contractors are still working they are increasingly struggling to secure supplies.
Current issues for tenants: Market insight
Tenants are facing the issues referred to above and are navigating the flip-side of them in their commercial life.
Where occupiers are in distress it will be essential to put a clear and compelling case together in order to persuade the landlord to reduce rent in whole or part along with service charges.
The options: landlords
If tenants have failed to pay the rent due then landlords can exercise rights of re-entry for non-payment of rent after 30 June 2020 (unless the landlord has expressly waived the breach).
If an agreed approach cannot be reached with tenants then landlords could serve a notice under the Commercial Rent Arrears Recovery Protocol as this has not been prohibited by the Act. Landlords could therefore serve a notice to satisfy the pre-condition to instructing bailiffs to recover unpaid rent.
However, each of the above represents a significant and drastic step. Working in a collaborative way with tenants to keep premises occupied is likely to be the more sensible approach and options can include:
- Agreeing with the tenant to delay rent payments e.g. until July but with the rent still being owed.
- Agreeing a temporary change to the rent payment dates to ease cashflow i.e. monthly rent payments in arrears rather than quarterly in advance.
- Agreeing rent holidays – this would result in the most significant cashflow impact on the landlord.
Rent arrears can also be recovered from rent deposits and temporary concessions could be agreed so that immediate top up of the deposit is not required by the tenants.
It is also worth landlords reviewing their own business interruption insurance to check if they can claim against the policies in the event of their tenants defaulting.
The options: occupiers
If tenants unilaterally cease making rent payments then ordinarily this would have come with the stark warning that a landlord could take immediate action to forfeit the lease. In light of the new legislation landlords cannot now take such action until after 30 June 2020. However, whilst this may feel like breathing space, tenants need to be aware that interest will continue to accrue on the unpaid sums and the unpaid rent itself continues to accrue. Further, if the tenant wants to return to trade from the premises careful thought needs to be given to future cash flow and financial obligations, as this rent will need to be paid at some point.
The first step for tenants is to review the terms of the lease to look for ways to negotiate with the landlord. There may also be a break right which the tenant can exercise. If there is a break right in favour of the tenant and there is time to serve the notice this could be of help to avoid further liabilities accruing by terminating the lease. However, most tenant breaks contain pre-conditions that must be strictly complied with. Generally the conditions include payment of rent therefore if there is unpaid rent the tenant will not be able to comply with the terms of the notice unless they pay the whole rent by the break date, in default of which they risk being held to the lease .
As mentioned above tenants can negotiate with their landlords for rent reductions, rent holidays, delayed payments or temporary changes to the rent payment dates. For tenants in the retail sector a temporary change to the lease could be agreed so that turnover rent only is payable.
Another option for tenants is to ask the landlord to return any service charge accruals rather than keeping them tied up in a sinking fund
If a tenant’s cash flow position is at critical level and a break is not available then tenants could seek to negotiate a surrender with their landlord. There is no guarantee that a landlord will agree, particularly in the current market. It is also crucial to factor in the likely dilapidations payments a tenant will need to make and whether a deal can be struck on such sums.
Although unlikely to apply, business interruption insurance is also worth reviewing. More practically, tenants should take advantage of the government support available; business rates have been suspended for retail, hospitality and leisure businesses in England as well as the grants being available in these sectors.
Documenting the agreed position: temporary concessions vs permanent variations
The first step is to carry out a review of the lease terms to look at the financial liabilities and where concessions can be agreed alongside possible variations to break terms and conditions. The terms of any licences to alter for tenants carrying out their fit-out should also be reviewed as a longer period is likely to be required for the works to be carried out.
Any changes to the lease terms must be agreed in writing and landlords will be keen to ensure that changes are temporary and do not amount to a waiver of breaches or a permanent variation to the lease. A side letter is often the most appropriate way to document the changes suggested above and the parties should take the advice of a commercial surveyor and lawyer at the negotiation stage and to document the agreement.
The law has provided some assistance to tenants by stalling landlords taking action to forfeit leases but what remains clear is that landlords need occupied premises and tenants need to rapidly improve their cashflow position. Landlords and tenants should therefore work together to maintain a good working relationship and rather than tenants unilaterally ceasing rent payments it would be preferable for an agreed position to be reached with its landlord and any concessions need to be carefully documented.
If you have any questions, please do get in touch with us:
Karli Hiscock – [email protected]
William Scott – [email protected]
Ralph Pearson – [email protected]
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of April 7, 2020.