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Coronavirus and the impact on Commercial Property
How Coronavirus may affect landlords and tenants within the Commercial property sphere
At Pearson Hards, we act for a number of commercial landlords, and tenants, and are seeing a significant increase in enquiries about what their obligations under their lease are. With many businesses now struggling to survive while they are forced to close or limit operations, many are struggling to pay their largest outgoing, which is their rent. Whilst the Government has pledged to meet 80% of furloughed employees' wages and many businesses have been given business rates breaks, rent still remains the single largest outgoing for many.
So what are the obligations? The answer lies in the lease and the particular clauses which have been agreed between the landlord and the tenant. It will be necessary to scrutinise the lease and see if there is anything in there which allows for the deferral of rent or rent free period. If you are a landlord, it may also be important to understand what, if any, obligations you may have under the lease, for example upkeep or maintenance of common parts. At Pearson Hards our expert team can assist you with this so you can fully understand your obligations. However, we set out below some of the considerations to think about.
What does the lease say?
It is important to check the agreement between the parties, which includes the lease and any ancillary agreements or amendments to the original lease. Most leases will have standard terms but it is still important to know exactly what has been agreed.
Most commercial leases will include a provision whereby there will be a rent suspension in certain circumstances. However, these usually only apply to situations where there has been damage to the property for an insured risk. This would usually cover a situation where there has been a fire, for example. This situation is unlikely to cover the current coronavirus outbreak as there is unlikely to be damage to the property itself. The issue here is that the Government has prevented people from utilising their properties. However it is worth checking whether there are any other circumstances which would allow for a rent break, such as an uninsured event taking place. Or some leases will include a force majeure clause, which allows for the cessation of a parties obligations if an event which is completely outside of their control – an “act of God” - takes place. These are unusual in modern commercial leases but they do occasionally still exist.
There has been discussion between academics of whether the inability to utilise the property could amount to a frustration of the lease and therefore entitle the tenant to end the lease prematurely. However, it is difficult to know whether these arguments would succeed in Court as the area remains unprecedented and previous cases are very different to the current circumstances.
What does the lease say about service charges? If some payment is due for service charges, then it is worth checking whether the landlord is able to continue their obligations in that regard. If not, then there may be scope for the service charges to be reduced. However, if the landlord decides he wishes to increase costs, for example by enhancing cleaning for the common areas, then most leases will include a provision to charge for all items which the landlord considers necessary. Therefore a tenant may find that this cost actually increases during this time.
It is also worth considering whether there is a break clause that either party can invoke. This would allow the tenant to give notice and end the lease. In the current climate, the tenant may decide that the business may not survive after the lockdown is lifted and therefore to remove their liabilities completely may be the best option for them. This could be significant for the landlord and may leave them with a vacant property for a significant period as re-letting may be difficult in the current climate.
What can you do if the tenant cannot pay?
Despite what the lease says, you may find that you (if you are the tenant) or your tenant (if you are a landlord) simply tells you that they cannot pay. So where does that leave the parties? Usually a landlord would have a number of options to pursue the tenant for non-payment including forfeiting the lease or commercial rent arrears recovery (known as CRAR). However, the Government has now stepped in with emergency legislation to prevent landlords being able to forfeit a tenant’s lease. This prevention was put into place on 25 March 2020 for a period of 3 months initially. This was done to protect tenants from being evicted and their leases forfeit. However, it does not stop the rent accruing and landlords seeking to recover that rent when the ban is lifted or seeking to enforce alternative methods of recovery.
Despite the ban on forfeiture claims, other methods of recovery such as suing for the rent as a debt, CRAR, issuing a statutory demand or commencing winding up proceedings are not prevented. Trade Body UKActive has called for urgent action to safeguard gyms and other leisure facilities as they have found a number of their members are being threatened with insolvency action, with no possibility of being able to defend those claims. They believe that other industries will be hit next, including cafes, restaurants, cinemas and other retailers.
The Department for Business, Energy and Industrial Strategy has asked for Commercial landlords to be reasonable and not to take such steps. They have issued a statement saying "In these exceptional times, we urge landlords to act in a socially responsible way, exercising judgement and discretion with their tenants."
We appreciate landlords may also be suffering as a result of loss of rental income and will have other commitments they rely on that income for and will need to know where they stand. Landlords should consider whether they have rent deposits they can use to plug any gap in the rental income. There may also be other parties that the landlord could look at to be responsible for the rent, such as under a personal guarantee under the lease or former tenant under an Authorised Guarantee Agreement.
If none of these other avenues apply and the sole responsibility is on the tenant who temporarily cannot pay, the Government’s hope is that landlords and tenants should work together to work out a way of dealing with this difficult period. It may be that the rent for the period the business is closed can be deferred and paid when they are back on their feet. Alternatively rent could be paid on a monthly basis rather than being demanded on a quarterly basis to help the tenant’s cash flow issues. It is not clear how the Courts will deal with any cases where the landlord takes a harsher line to the non-payment and takes action without negotiating. We will have to watch this space.
As stated above, we have got experts who keep updated with current laws and on what options may be available to both landlords and tenants. Moreover, our experts can review each individual lease to also plan for any future risks. Early communication between the parties is key to everyone surviving this difficult and unprecedented time we’re all experiencing. If you would like to speak to our Commercial Property experts then contact David Hards, Donald Morrison or Claire Darby today on 0208 949 9500.