COVID-19 – commercial property: landlord and tenant considerations

Commercial Property Partner Hannah Bambury discusses the coronavirus in relation to commercial landlords and tenants.

The impact of the coronavirus (COVID-19) pandemic is having unprecedented repercussions throughout all aspects of life as we know it – and is likely to continue to do so for some time to come. Whilst we are seeing a general slowdown in commercial property transactions in response to the uncertainties in the wider market, we are also seeing concerns amongst landlords and tenants, who are looking to limit the effect on their respective businesses.  

Government intervention has been swift and extensive – with business loans, guarantee schemes, employment support packages and with the Coronavirus Act 2020 (that came into force on 26 March 2020) which contains a number of provisions designed to limit the impact on businesses in response to COVID-19.

In addition, a business rates retail discount to 100% for one year from 1 April 2020 was announced in the Budget and extended to hospitality and leisure businesses, in response to COVID-19. The government has now announced that this business rates exemption in 2020-21 will also apply to estate agents, lettings agencies and bingo halls that have closed due to COVID-19 measures. How this rates holiday will be applied has yet to be clarified, but further guidance is expected shortly. 

This note sets out some commercial property and, specifically, landlord and tenant considerations in what is a rapidly moving climate, with our commercial property experts selecting some key issues for commercial landlords and tenants to consider, as the coronavirus crisis unfolds.

  1. Lease terminations

It would be unusual for commercial leases to contain termination provisions in the event of force majeure. The ability for a lease to be terminated usually arises where a tenant has failed to pay the rent when due, has breached some other term or obligation in its lease or where a tenant has become insolvent.

The government announced this month that all commercial tenants in England, Wales and Northern Ireland missing rent payments are to benefit from a government ban on forfeiture of their lease, with “rent payments” applying not only to principal rent, but to “any sum a tenant is required to pay”. The effect of this is that landlords will be prevented from terminating leases and evicting commercial tenants whilst having to bear the burden of supplying services and insuring the premises. This arrangement is to last until 30 June 2020, with an option for the government to extend this deadline. 

One potential area of uncertainty is what constitutes a “commercial tenant” and whether this extends to parties occupying commercial premises under licence or group sharing arrangements.

It is also worth noting that this arrangement does not constitute a rent holiday. Any rent due remains due and payable and a landlord’s ability to seek recovery of such outstanding rent payments continues. Indeed, the government has made it clear that non-collection of rent during the forfeiture moratorium period will not be treated as a waiver by landlords to pursue rent. Also, other forfeiture breaches remain unaffected during the forfeiture suspension period. 

  1. Rent suspension

Whilst commercial leases typically contain rent suspension provisions, these typically apply only in circumstances where the premises in question experiences damage or destruction, such that the tenant cannot continue to occupy the whole (or relevant part) of the premises.

It is very unlikely there will be any provisions in a typical commercial lease, for rent suspension in other circumstances.

  1. Lease variations

Tenants may be keen to explore more favourable lease terms at this time, such as switching rent payments from quarterly to monthly payments, but it is important to note that such variations will be in a landlord’s discretion to agree. A tenant cannot compel a landlord to agree to such changes. Having said that, it is almost certainly in a landlord’s best interests to ensure that its premises remain occupied and rents continue to be paid where possible, so it would be worth a tenant having this conversation with its landlord if such arrangements would assist. Other variations, such as agreeing additional/extended rent free periods, the insertion of a break clause (or bringing forward the break date in a break clause) are possibly matters which will be looked at less favourably by a landlord but, in these unusual times, it is advisable for a tenant to explore all possible options and, in turn, for a landlord to try to be as flexible as possible in its approach to such requests.

Any changes agreed should be documented between the parties, but a landlord may not want this done in such a way as to constitute a formal lease variation. Instead, a landlord may want to adopt a more confidential approach, as the arrangements it is prepared to agree may well differ from tenant to tenant. If in doubt, please discuss this with us and we can provide more guidance on this issue and look to document any such arrangements.

  1. Business interruption insurance

As with rent suspension provisions, the terms of business interruption insurance policies usually apply in cases where the insured party’s business cannot continue for specific reasons (and, in some cases, such policies may extend to business interruption caused by pandemics, but this is not commonplace). However, where the government has required certain businesses to close in order to assist in preventing the spread of the Coronavirus, this may be something that is covered by such insurance, so this is worth considering.

In conclusion, there is unlikely to be any provision in typical commercial leases which in any way cater for the current crisis the commercial property market finds itself in. As such, landlords and tenants will both benefit from keeping their lines of communication open. It is ultimately going to benefit all parties if they are able to reach some sort of voluntary arrangement(s) in these uncertain times, with a view to preserving their respective business interests as much as possible.

With this is mind, please do get in touch with us to discuss possible options and solutions which may be available to you, whether in your capacity as a landlord or a tenant, at this time. We can assist you with tailored legal advice on the best available solutions to mitigate your risks during the COVID-19 crisis and documenting any voluntary arrangements you may look to agree.

This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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