Room with a View – FAQ – issues for commercial tenants during COVID-19
23 June 2020
Commercial landlords and tenants have undoubtedly found themselves in an equally tough situation in the last few months. At the time of writing, the Government has introduced an emergency suspension of a landlord’s right to forfeit leases or exercise certain enforcement processes.
The Corporate Insolvency and Governance Bill will (when enacted) put further constraints on a landlord’s ability to force a tenant to pay up. Finally, the Government is leading a consultation group with industry groups to introduce a voluntary code of practice for negotiations on rents between high street tenants and their landlords1. You might think that the direction of travel is all one way, to protect tenants to the detriment of landlords. However, there remain a number of challenges for tenants, as well as other opportunities. In these FAQs, we tackle some of the common questions.
How can tenants comply with break clauses during COVID-19?
It is unsurprising that during a time of financial uncertainty and instability for many businesses, a lot of commercial tenants may be considering terminating their leases. Before doing anything, tenants must consult their lease and check the break conditions. The more common conditions (giving the landlord vacant possession, being up to date on rent payments and complying with the covenants in the lease) may be that much more difficult to comply with at this time. Is it practical to access the premises to clear them out? Are all rent and other payments up to date?
Before tenants serve notice in accordance with their lease, they must be sure they can comply with their break clause. Landlords often try to catch tenants out on break clauses at the best of times so during this uncertain period, where landlords will likely be looking even closer at ways to prevent a break, it is crucial that tenants are certain that they can comply with the lease obligations. That will involve taking early action and seeking professional advice at the earliest opportunity. For more information on the issues to consider on break clauses, see the next article.
Is there an alternative option to a break clause if tenants are unable to obey the break conditions?
If exercising a break will cause too many complications, tenants should consider what alternatives are available. This may include speaking with their landlord and see whether they would agree to a deed of surrender. A deed of surrender is a mutual agreement between the landlord and tenant to end the lease. A landlord is not under any obligation to agree to this, but it is always worth having an informal chat with them to see whether it is something they would consider, particularly where they might have redevelopment plans for the building. Depending on the relationship between the two parties, the landlord may agree to waive some of the lease conditions on the tenant in order for them to do this.
Another alternative may be to use a break clause as a negotiating lever. Now, more than ever, landlords will be keen to retain the income stream from a good tenant. Surrendering a break right in return for some other concession (a rent reduction/re-gearing) may be a better long-term solution for tenants who expect to make a strong recovery. It may buy the vital ‘breathing space’ needed to enable that recovery to happen.
Will COVID-19 have an impact on landlords giving consent?
Commercial leases have a number of clauses where a tenant must obtain the landlord’s consent. During this time, it is likely that landlords may delay giving consent to tenants or even, in some situations, refuse altogether. Whilst landlords are generally under an obligation to act reasonably when refusing consent (as provided for by the lease), it is likely that some landlords may try to interpret ‘acting reasonably’ a little differently right now. However, a failure to give consent to a proper application may relieve the tenant from certain obligations so pursuing applications tactically may still yield results.
Now is the time for landlords and tenants to come together and have commercial yet casual conversations about how to navigate through a situation in a way that achieves the best available outcome for all parties involved. It is important they work together to achieve feasible outcomes but that both parties consistently act in accordance with their lease provisions.
Will rent reviews still take place during this time?
In short, yes. Rent reviews will continue as normal, although landlords may be reluctant to initiate them. What landlords and tenants will need to consider closely is what type of rent review applies to their leases. As many leases are subject to an ‘open-market’ rent review, even on an ‘upward-only’ basis, that might mean, in the current climate, a zero increase. This may create its own opportunity for tenants to ‘leverage’ a better overall commercial deal if the landlord is faced with a locked in rental return for the next three to five years.
What happens if a commercial tenant does not pay rent?
We mentioned at the top of this article some of the interventions that the Government has already made on this topic. It is crucial that tenants do not become complacent in this scenario. While the breathing space may be vital, it is important to have a plan beyond the coming days and weeks. What will the longer-term prospects be? For some occupiers, in the retail and office markets, it means a contraction in demand for space as more business is carried out online or remotely. For others, in logistics and distribution, it may well be the time to increase their property footprint. Careful planning and early professional advice will navigating these choppy waters that bit safer.
This article is from the summer 2020 issue of Room with a View, our newsletter aimed at professionals within the property industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at June 2020.
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1. Since preparing this article the Code of Practice has now been published and the Government has announced that the moratorium on forfeiture will be extended to 30 September.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2020.