The coronavirus situation is ever-changing, with the government making announcements daily to assist people, businesses and the economy through this unprecedented period.
We have focused this guide on the money situation from a commercial lease perspective – annual rent, service charge, insurance payments and business rates – with a re-cap on insurance policies.
Most commercial leases have quarterly payment dates for the annual rent and service charge. With the March quarter date just round the corner (25 March), many landlords and tenants are speculating on what is going to happen.
Giant retailers like H&M, Superdry and Debenhams have already contacted their landlords to ask for rent relief, whether in the form of monthly rather than quarterly payments or a rent holiday. It will come as no surprise to any landlord that tenants big and small will be asking the same in the following days, if they have not already done so.
Will landlords say yes? Unless there is some wording in the individual lease which allows for a rent reduction in specified circumstances, there is nothing obliging landlords to agree to any form of rent relief.
The typical scenario for rent suspension under commercial leases is where the property is damaged by an insured risk, or sometimes, an uninsured risk. However, this will not come into effect in the current coronavirus situation as the buildings or properties are not damaged or destroyed.
Landlords are entitled to forfeit for non-payment of rent, although it is questionable whether in the current situation they would seek forfeiture other than as a very last resort. No landlord wants insolvent tenants, empty properties or to be responsible for business rates, and it may be that many landlords will be willing to open meaningful discussions with their tenants in a spirit of enlightened self-interest, if not outright altruism.
How about tenants’ personal concessions? These are usually recorded in side letters and are usually dependant on tenants performing and observing the covenants in the lease, of which payment of rent is one. Any personal concessions may be up for negotiation or lost as a result of agreeing to rent relief.
Can tenants stop paying rent if they close their properties voluntarily for a temporary period? It is unlikely that landlords will accept such closure as a reason for rent relief. Related to this is that, unless the tenants have a keep-open clause in their leases (which are common in retail leases), landlords are not obliged to make tenants keep their premises open. Those with turnover rents are more likely to be the ones containing keep-open clauses. Such tenants will need to carefully review their leases to see what the implications of closing are, for example, are there any exceptions, is there a penalty or does the rent revert to a fixed amount for those closed days?
What if landlords shut down their commercial buildings and tenants are unable to access their premises? Landlords would be breaching their quiet enjoyment obligations to let the premises to the tenants without any lawful interruption and would be exposing themselves to claims. Tenants would be advised to check the terms of their leases – perhaps there is scope for reducing or suspending service charge payments; or even the rent? If, however, the Government legislates that all commercial buildings are to be closed or a regulatory authority like Public Health England directs so, then this will be a different matter.
- Service charge and insurance payments
Will insurance payments be stopped? It is unlikely to be controversial that tenants should continue to pay towards their landlords’ building insurance premiums.
How about service charge? Service charge also continues to be payable, although tenants could seek to negotiate if their landlords shut down buildings. A more common issue is landlords intensifying their cleaning services in order to adhere to Government guidelines by the provision of more cleaning or deep cleans and the provision of additional sanitary products. The terms of leases will be scrutinised by both landlords and tenants alike. Landlords would ideally like to pass on all increased costs to their tenants. Tenants would rather they didn’t!
- Business rates
What is the Government’s current stance? The announcement from the Government on 18 March provides some relief and goes beyond what was promised in last week’s Budget. A business rates holiday for retail, hospitality and leisure businesses in England for the 2020/21 tax year will be introduced; as well as a £25,000 grant to those in such sectors operating from smaller properties with a rateable value between £15,000 and £51,000. Local authorities will publish guidance on 20 March. However, this does not extend to other business sectors which are also struggling and have full rates bills to pay. Will this relief be extended? We must wait and see.
How about for small businesses? The only glimmer of light is for small businesses which pay little or no business rates because of small business rates relief. These small businesses will also receive additional funding, being a one-off grant of £10,000 to help with ongoing business costs.
We touched on insurance in our Coronavirus Insight (on 6 March) and would reiterate the importance to check the terms of your insurance policy in relation to business interruption in particular to see what is and is not covered. Predictably, indications are that Covid-19 is not covered but numerous claims against policies are anticipated with litigation no doubt to follow.