Every landlord and tenant relationship is different and both landlords and tenants are encouraged to engage with their lenders and finance providers to seek flexible support in relation to their existing financial arrangements where this is needed. UK Finance has issued the following guidance to assist: www.ukfinance.org.uk/covid-19/business-support/support-for-commercial-landlords
The Government has published a voluntary code of practice to help commercial landlords and tenants during the coronavirus pandemic drafted to provide clarity for businesses when discussing rental payments and to encourage best practice so that every part of the commercial property sector is supported.
What do commercial landlords need to consider?
Many commercial landlords will be dealing with further disruption resulting from the virus outbreak and the continued lockdown.
Key elements to consider include:
- Tenants attempting to end their leases early
While tenants may try to claim that due to COVID-19, their lease has been frustrated, it is unlikely they would be successful. Historically, courts have taken a very restricted view on frustration – a claim by a tenant that Brexit frustrated their lease was rejected by the courts last year.
Unlike the majority of commercial contracts, force majeure clauses are extremely rare in commercial leases (although this may now change), and so it is unlikely that tenants would be able to use this as a way to end a lease. Having said that a tenant who does have a lease containing such a clause should seek advice. Depending on the wording of the particular clause it may be possible to argue that the lease is at an end.
The current situation may result in a host of new CVAs or in tenants becoming insolvent. Financial difficulties such as these could trigger the landlord’s ability to end the lease early and may lead to conversations where a short term rent suspension is agreed, despite not being provided for in the lease.
The majority of rent suspension clauses require a level of material damage or destruction to the premises which are let and are not triggered by a material change in the tenant’s business; Government imposed restrictions regarding use/closure or the wider economy. As the fall-out from COVID-19 is primarily financial, a typical rent suspension clause would not apply.
If a tenant has negotiated different terms to a typical rent suspension clause, then such leases would be considered on a case by case basis and lease terms should be reviewed.
If there is an outbreak of COVID-19 at a landlord’s multi-let property, it may be appropriate for the landlord to close or restrict access to the building. While this may not be in line with all tenants’ wishes, and they may try to claim derogation from grant, most commercial leases allow landlords to change the areas over which access is granted and in some cases even restrict access in emergency situations, especially when following advice from the Government.
Where a tenant occupies part of a building, the landlord undertakes responsibility for cleaning. While there is no legal requirement for landlords to carry out extra cleaning due to COVID-19, many landlords are taking precautionary measures and deep cleaning premises or cleaning more often. Costs for such extra services may be recoverable under service charge clauses and the terms of any agreements will need to be considered to ascertain if such costs are recoverable.
Commercial landlords are obligated to take reasonable measures to protect the health and safety of both their tenants and anyone entering the building. It would be wise for landlords to undertake a full risk assessment in light of any concerns about COVID-19 and to follow advice given following that assessment and any Government guidance
- Negotiating future leases
Going forward, it would be sensible to look closely at obligations in relation to the impact of COVID-19 when negotiating any commercial leases. In addition, it may be that clauses which allow for a rent reduction or rent suspension in the event that there is a “materially adverse change” to the tenant’s business or an event which causes the tenant to stop trading from the premises during the term may start to become standard requests from future tenants although landlords should consider documenting any such arrangements by way of a personal side letter rather than provisions in the actual lease.
On 9 December 2020 the Government announced that the moratorium imposed by the Coronavirus Act 2020 would be extended to 31 March 2021. In a nutshell the moratorium protects a business tenancy from forfeiture for non-payment of rent and nor can a landlord use the procedures under the Commercial Rent Arrears Recovery (CRAR) to recover rent arrears.
A landlord may be entitled to forfeit a business tenancy relying on other grounds but a landlord’s remedies based on rent arrears are significantly curtailed until 31 March 2021 at the earliest.
On 8 December 2020 the Government announced the restrictions under the Corporate Insolvency & Governance Act 2020 would be extended to 31 March 2021. The restrictions prevent a creditor from presenting or pursuing a winding up petition where the Act applies.
We understand the Government will commence a review of commercial landlord and tenant legislation this year and will consider a broad range of issues including the Landlord & Tenant Act 1954 Part II, different models of rent payment, and the impact of Coronavirus on the real estate market.
What should tenants be considering?
Commercial tenants will of course be equally disrupted by the spread of COVID-19, and any steps put in place to mitigate this including the current lockdown. In terms of commercial leases, this should include considerations around:
The Chancellor of the Exchequer has announced a raft of support for businesses during this time of crisis, especially those in the leisure and hospitality sectors. The exact help available will depend on individual circumstances.
- Business interruption insurance
While tenants may not be able to get out of their lease early or cease paying rent to their landlords due to COVID-19, they may well be able to recover rent under their business interruption insurance. Every policy will be different and not all will allow a claim.
On 15 January 2021 the Court of Appeal handed down its judgement in a test case brought by the Financial Conduct Authority. As a result of that judgement many more policy holders will have valid claims and some pay outs to policy holders will be higher. The FCA has issued a number of communications setting out its expectations of insurers and how business interruption claims are to be treated during the COVID-19 pandemic. In addition the Association of British Insurers has included on its website a section detailing how such claims are to be handled. Tenants who might have had their claim refused by their insurer should look again at their policy and consider making a fresh claim following this important decision.
Tenants, especially those in the retail sector, need to be aware of breaching their keep-open covenant. Many may feel they are stuck between a rock and a hard place as their lease will also state they need to comply with official guidelines, which in this case could, depending on the type of business that they operate, force them to close in compliance with the current lockdown restrictions.
In this situation, it is likely that any Government order will override a keep-open clause. However, tenants must communicate with their landlords and managing agents if they are closed and will not be in occupancy of the building for a length of time.
Although this is not the first lockdown the vast majority of businesses are currently unclear as to what the future holds and when this lockdown may end, equally wary of any future lockdown or restrictions that may be imposed. If you have any questions, our legal experts are here to help.
Click here to view our Residential Tenancies Q&A.
Click here to view our Commercial Tenancies Q&A.