However, have there been any changes impacting the rents situation from a commercial lease perspective?
Help: the June quarter date is looming!
The main rental obligations in a commercial lease are the annual rent, service charge and insurance premiums, with the first two usually payable quarterly in advance.
- Annual rent – many landlords and tenants have been working together to find various methods of temporary rent relief to suit their individual circumstances, whether in the form of rent holidays, deferrals, reduced payments for specified periods, monthly rather than quarterly payments or some combination of the above. Landlords do not have to agree to any form of rent relief, though if they don’t they may be left with insolvent tenants, empty properties and responsibility for business rates. Landlords will also have to consider the covenants they have with their funders in order not to be in default. Even with the current ability for many businesses to return to their properties, it seems unlikely that landlords will see any substantial uptick in rent receipts on the June quarter day. For the moment, a delicate balance is required between everyone’s interests and the continuance, or start, of any temporary rent relief measures may be a way forward for most parties. Any agreement should be documented properly to avoid future disputes.
- Service charge – tenants may well see an increase in their service charge, especially as landlords prepare their properties for the return of tenants. Recent government guidance for businesses on working safely stresses the importance of maintaining social distancing, managing transmission and increased hygiene. All recommended measure, for example, putting up signs, arranging one way systems, using screens and barriers, increased provision of hand and other sanitation products and deeper and more frequent cleaning cost money. Landlords will seek to recover these costs through the service charge, which will not be welcomed by tenants who are already struggling. The terms of the lease will guide what the landlord is obliged to or may do and what is or is not recoverable. Most leases will, however, have a general clause for landlords to provide and charge for services in the interest of good estate management.
- Insurance premium – this is the least controversial of the main payments as the landlord’s building will still need to be insured to protect it from property damage.
Help: from legislation (current and proposed)
- Moratorium on the landlord’s ability to forfeit leases for non-payment of rents – this is contained in the Coronavirus Act 2020 and provides some targeted relief for tenants of commercial property from 26 March until 30 September 2020. The revised 30 September 2020 date was announced by the Government on 19 June 2020 and it will come as a relief to plenty of tenants. After that date, the normal provisions will resume. Rents include service charge, insurance rent and any sum which the tenant is liable to pay under its lease. However, landlords still retain the right of re-entry and forfeiture for any other breaches and interest on unpaid rents will still accrue.
- Commercial Rent Arrears Recovery (“CRAR”) – the minimum level of unpaid rent before CRAR can take place has increased. Landlords must be owed the equivalent of 189 days’ unpaid rent, instead of the previous 90 days. This is found in the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 which came into effect on 25 April 2020. The recent increase from 90 to 189 days was announced in the Government’s 19 June 2020 press release and the period for which this is in force will also be extended from 30 June to 30 September 2020.
- Ban on statutory demands and winding-up petitions – the government has introduced a ban on serving statutory demands (between 1 March and 30 June 2020) and using winding-up petitions (between 27 April and 30 June 2020) where COVID-19 has had a financial effect on the company. This is included in the Corporate Insolvency and Governance Bill 2019-2021 (the “Bill”). An amendment has been recently proposed to extend such 30 June 2020 date to the 30 September 2020. As well as the above-mentioned bans, the Bill will bring big changes to the current insolvency regime. The Bill will be at the reporting stage (House of Lords) of the legislative process tomorrow. The intention is for it to be law by the end of June 2020.
- Stay on proceedings – the Civil Procedure Rules and Practice Directions have been amended so that the current temporary stay on all possession and enforcement proceedings will be extended from 25 June until 23 August 2020. Landlords can still bring a claim, but must be aware that it may be stayed.
Help: a new rent Code of Practice
The Government published a new code of practice “Code of Practice for commercial property relationships during the COVID-19 pandemic” on 19 June 2020. This is a voluntary code for businesses and is relevant to all commercial leases. It is a temporary code, applying until 24 June 2021.
It sets out general principles of encouraging transparency, good faith and collaboration between the parties, supporting one another to manage the economic and social consequences of COVID-19, using government support for business costs (which includes rent and other property costs), acting reasonably and responsibly and using third party mediators to help come to a mutual agreement.
The code also provides guidance on seeking any rent arrangements and a list of suggested considerations for landlords to bear in mind when considering tenants’ requests for rent relief, for example, closure impacting the tenants’ businesses and ability to trade via other means, government support received and how this has been used and the tenants’ track record under their lease terms and any agreed concessions. The code sets out a number of suggested rent arrangements. We touched on some earlier in this article. The other suggestions include using rent deposits without the need for the deposit to be topped up before it is realistic to do so, landlords waiving interest on unpaid or late payments to make payment plans more affordable and re-gearing leases, for example, removal of a tenant’s break right.
The code also covers service charge and insurance, recognising that both may have an impact on tenants’ finances. Buildings must continue to be insured and service charge costs are to reflect services actually provided.
The link to the Government’s code is here: https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector/code-of-practice-for-commercial-property-relationships-during-the-covid-19-pandemic
Help: working with each other
It is very important for landlords and tenants to communicate and be open with each other over their financial situations. Legislation and guidance aside, it boils down to both sides working together to ensure that as many businesses get through these difficult times in the best shape as possible.
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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 June 22, 2020.