It is important to note the effect that Covid-19 has had on commercial Landlords and Tenants.
Most who can, are now working from home. Many industries have come to a complete stop and everyone is dealing with the consequences of the pandemic. However, many who have adapted quickly and positively to the crisis have been able to say with confidence to their customers and clients that “it’s business as usual’.
That being said, there are a number of specific issues that Landlords and Tenants may need to consider now that the ripple effects of the regulations have become more apparent.
Forfeiture
The Government has announced that Landlords cannot forfeit a commercial lease for non-payment of rent until 30 June. This includes non-payment of service charges and Tenant’s contribution to insurance premiums. However, it appears that rent deposits and claims against guarantors are still available options for Landlord.
Force majeure
Construction and development contracts often contain terms allowing the lease to be terminated or some lease obligations to be delayed, due to ‘acts of God’. Whilst most commercial leases don’t contain such provisions, Tenants may want to check the specific terms of their contracts.
Insolvency
Non-payment of monies due to the Landlord under the terms of the lease may result in the Landlord serving a statutory demand. This requests payment within 21 days. Subsequent failure to pay gives the Landlord the right to apply to bankrupt the individual Tenant or wind up the Tenant Company. However, a Landlord is less likely to use this procedure if the Tenant does not have the funds to pay.
Frustration
This may apply if, through no fault of any party, a contractual obligation has become incapable of being performed because performance would be radically different from that which was agreed. This could be because performance and purpose of the agreement becomes impossible. Covid-19 might cause an agreement to be frustrated, thus cancelling the agreement.
Cessation
Tenants looking to get out of their lease obligations should have their lease checked as there may be grounds for terminating the lease. However, this is normally limited to destruction of the property and therefore rarely available to avoid paying future rent.
Dealings
A Tenant may be able to remove itself from the lease by finding an assignee or a party who will take an underlease. In the current crisis that is likely to be extremely difficult. Another option might be for the Tenant to offer to surrender the lease to the Landlord. However, this would have to be consensual. It is hard to see why a Landlord would agree without requiring a financial incentive from the Tenant.
Rent
The Tenant might approach the Landlord with a number of suggestions such as
• a rent holiday e.g. a rent free period for 3 months;
• reducing rent temporarily
• changing the rent payment dates
• deferring rent, with or without interest penalties, for an agreed period
This will need to be negotiated. The landlord will need to bear in mind the alternative may be to lose the Tenant entirely with the prospect of trying to find a Tenant to take a new lease in the current climate being unlikely.
Shopping Centre Leases
If the Tenant fails to keep the property open for business within obligatory opening hours, the Landlord may find enforcement particularly difficult in the current climate.
General
The Landlord and Tenant’s lease obligations will generally continue as before. Tenants will need to keep the property in good repair and comply with statutory requirements as well as insurance obligations, even if no longer in occupation. Landlords will need to take into account the unmarketability of their property during the pandemic crisis; and whether their Tenant can afford to continue making payments.
The benefits to a Landlord having a good commercial Tenant in situ go beyond payment of rent and service charges. Having no Tenant means that the Landlord will need to take over many obligations that would otherwise be the responsibility of a Tenant such as repairs, statutory obligations, security etc.
Conclusion
During this difficult time, the Landlord’s default position will be to do nothing and hope for the best. However, where a Tenant is truly in financial difficulties, the sensible and practical advice to both Landlord and Tenant is to open a dialogue and work together with a view to getting the best they can out of the current situation, knowing that both may need to consider making compromises.
How Blaser Mills Law can help
If you would like further information on the contents of this article then please contact David Michaels on 01494 738069 or at dgm@blasermills.co.uk
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.