The Coronavirus outbreak and resultant direction to businesses to close has put unprecedented pressures on commercial landlords and tenants alike. After paying staff, the costs of premises are likely to be an SME's greatest overhead, as well as being vital to the future survival and success of the business once this crisis has passed. At the other end of the equation, landlords need rental revenue and may well not want to lose the tenant or regain possession of the premises in the current climate. In this blog, we shall examine in more detail the key issues facing landlords and tenants in these challenging times, plus government led initiatives recently put in place.
Suspension of the landlord’s right to forfeit
As with other sectors of the economy, the Government has sought to give breathing space to tenants of commercial premises. The Coronavirus Act 2020 (S82(1)) states that a landlord of commercial premises cannot take action to forfeit the lease for non-payment of rent, or other financial sums due under the lease, for the period 26 March to 30 June 2020. This end date may be extended by the Government, depending on how the situation unfolds. The Government announced that this legislation would mean that “commercial tenants who cannot pay their rent because of coronavirus will be protected from eviction” and “no business will be forced out of their premises if they miss a payment in the next 3 months”. However, the liability to pay the rent is not extinguished, it is merely suspended until the moratorium comes to an end (currently 30 June 2020), at which point it becomes due and payable and the landlord can seek to forfeit the lease for non-payment of all the accrued arrears. It is quite possible, if not likely, that it is at this point as the business is getting back on its feet, that it needs protection from eviction more than ever.
Rent and other monies remain due and payable by the tenant, once the moratorium ends and the landlord can seek to forfeit the lease for non-payment of accrued arrears
Other remedies in respect of non-payment of rent and other financial sums may still be available to the landlord during the moratorium on forfeiture, such as instigating insolvency proceedings or calling on personal guarantees and rent deposits
The moratorium does not apply to forfeiture for any non-financial breaches; a landlord remains free to proceed in respect of those in the ordinary way.
As the Government noted, when unveiling its suspension of the right to forfeit “..many landlords and tenants are already having conversations and reaching voluntary arrangements about rental payments…” Some commercial landlords and tenants are reaching agreement on amendments or concessions to see them through the current situation. Common examples include:
Changing rent payment dates to monthly, rather than quarterly
Suspension of rental payments for a period, such as 3–6 months
Reduction in rent, whilst the Coronavirus is still detrimentally affecting business
That the rent is permanently or temporarily converted to a turnover-only basis
Whatever is agreed, legal advice should be taken as to what rights the tenant and landlord may already have (such as a break option or Force Majeure provision), what options there may be and, critically, to correctly document whatever the parties agree, so as to protect their respective interests and avoid unintended consequences.
Look at the lease! This is the key document, which governs the relationship between landlord and tenant and the terms on which the tenant has the right to occupy the premises. This, along with any side letters or other ancillary documents, needs to be examined carefully at the outset to establish the foundations of any negotiations
Ensure that any variations or concessions are properly documented in writing and accord with the lease provisions
Whilst a tenant may instinctively wish to “walk away”, this rarely works in practice. A landlord should not accept the keys back from the tenant, as this could arguably have the effect of surrendering the lease by operation of law. If the parties agree to surrender the lease, this needs to be properly documented in writing. This is of particular importance to the tenant, who remains liable for the tenant’s obligations and liabilities in the lease, unless and until the lease has been effectively surrendered.
Both parties should consider the insurance position in respect of the tenant having to cease trading and the premises being left empty. The lease may well require the tenant to maintain a certain level of security, if the premises are left vacant, and require compliance with the insurer's requirements generally. The landlord will have to comply with the terms of its own insurance and this is likely to include an obligation to notify the insurers if the premises are left empty.
Consider the terms of any personal Guarantee or Rent Deposit. Calling on these may well be an attractive remedy for a landlord, but has significant financial implications for the tenant and/or guarantor.
In closing, what should you consider as the next steps?
Communication is key; if both parties can understand the other's situation and objectives, then reaching a mutually acceptable concession should be more likely.
If concessions are agreed, both parties should seek legal advice to ensure these are properly documented to protect their respective interests and to avoid unintended consequences.
Tenants should not refuse to pay the rent during the moratorium, nor simply walk away; neither of these actions is likely to release the tenant from its contractual obligations under the lease.
Landlords should be reassured that, whilst they cannot seek to forfeit for non payment of rent during the moratorium, the rent continues to fall due and the right to forfeit for non payment of those accrued rent arrears arises again, once the moratorium ends.
If you are planning to sign a lease contract for a commercial property keep reading.
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