covid-part-2

Commercial leases in exceptional circumstances: the pandemic (Part two)

Commercial leases in exceptional circumstances: the pandemic (Part two)

In part one of our blog we looked at the challenges faced by tenants and landlords of commercial properties, if you missed it, you can read it here.

We looked at the exceptional circumstances causing the issues and the practical steps the government has put in place to help, like the Coronavirus Act 2020 and a new code of practice for Commercial Property Relationships – the Code.

Now we look in more depth at the Code and some possible alternative rent arrangements which tenants and landlords could agree to, which include:

  1. a full or partial rent-free period for a set number of payment periods
  2. a deferral of the whole or part of the rent for one or more payment periods
  3. the payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly) including provision for their payment in arrears
  4. rental variations to reduce ongoing payments to a current market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed
  5. landlords drawing from rent deposits on the understanding that the landlord will not then require that the deposits be “topped up” by the tenant before it is realistic and reasonable to do so
  6. reductions in rent, either in whole or part, across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units
  7. landlords waiving contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable
  8. provisions for ending the solutions on a fixed date, or on reaching the trigger point of particular circumstances
  9. tenants and landlords agreeing to split the cost of the rent for the unoccupied period between them
  10. any of the above in return for other arrangements e.g. a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, or an extension of the lease

If the negotiation proves to be fruitless, then the conditions outlined in the Coronavirus Act 2020 include the following:

Forfeiture for non-payment of rent

Currently, forfeiture for non-payment of rent in respect of commercial leases covered by the Landlord and Tenant Act 1954 is suspended, and will remain so until September 30th.

Although this gives tenants some breathing space they should not make the mistake of thinking this equates to a rent holiday. The rent will still be due and, once the moratorium is lifted, landlords will be within their rights to seek forfeiture for non-payment.

Commercial Rent Arrears Recovery

Unable to threaten forfeiture, a landlord might wish to appoint bailiffs to recover the rent owed. However, there are several issues with this course of action, not least the fact that it is only possible in relation to occupied premises. Also, a change introduced on 18th June 2020 stipulated that Commercial recovery of this kind can only happen if there are 187 days of rent arrears, rather than the standard 7 days.

Forfeiture for other breaches

Although forfeiture for non-payment of rent is currently suspended, forfeiture for other reasons might still be an option. Many leases include a keep open clause for example, and a landlord may feel this clause has been breached.

However, up to the 4th July, most non-essential retail, hospitality and leisure outlets would have argued in their defence that the provisions of the Health Protection Regulations 2020 had compelled them to close.

The situation is now slightly less predictable, but there is still a very good chance that the court might take the social distance implications of arranging vacant possession into account and grant relief from forfeiture.

In addition to this any landlord would have to consider the fact that forfeiture, in the current climate, would leave them with an empty property which might be difficult to let for anything other than a much reduced rent, to say nothing of the potential for bad publicity.

On balance, any landlord suffering the effects of non-payment of rent due to COVID-19 would be best advised to work collaboratively with their tenants to try and devise a path through the problem.

Utilising one of the measures outlined in the Code of Practice could be an option, like turnover rents in particular, which are proving to be an increasingly popular choice and something we have covered in another blog, you can read here.

So whatever challenge you face with your commercial property, if you would like to discuss your options with an experienced specialist real estate lawyer, please speak to Karen Mason on +44 (0)20 7464 4081 or email karen.mason@newmanor.com