COVID-19: Key considerations for commercial landlords and tenants

To combat the spread of COVID-19, the Government ordered the closure of a stark number of businesses and venues. As a great number of the UK population have had to adjust to working from home, restricted travel and conducting business in new environments in these unprecedented circumstances, landlords and tenants have been raising an increasing amount of queries and concerns.

There are many things for both parties to consider, and it is important to note that although leases will contain many similar provisions, it is imperative you check your individual lease very carefully.

Coronavirus Act 2020

What is of particular importance to landlords and tenants  is the Coronavirus Act 2020. The Act was announced on 23 April, and has been drafted in a very broad manner. It refers to tenants and those who are occupying for the purpose of carrying on a business. The Act will be in force until 30 June 2020,  but it is subject to extension by the Secretary of State.

The Act puts in place a ‘Relevant Period’ which delays a landlord’s ability to exercise their right to forfeit, until this period ceases. This is referred to in s82 of the Act. The Act does not, however, apply to short leases – those for  a term of less than 6 months. A landlord under normal circumstances would be able to seek to forfeit commercial leases for arrears of rent. A tenant is still obligated to continue making their rent payments as they fall due under their lease, however if they do withhold rent during this period there are a few matters to take into account:

1. Once this Relevant Period comes to an end, the tenant will still be liable for the payments incurred, as well as any interest that may have accrued.
2. Although the landlord cannot forfeit the lease during this period, due to non payment of rent, there are other remedies the landlord may wish to seek:

• To make a claim for the debt for breach of the lease via court proceedings
• Payment from a guarantor under the lease
• To draw down from any rent deposit held under the lease
• The method of Commercial Rent Arrears Recovery (CRAR) in which the landlord can enter the premises and seize assets to the approximate value of the rent owed. However, a landlord will not be able to rely on this remedy unless 90 days or more of unpaid rent is owed.
• To issue a statutory demand as an initial step towards winding up proceedings. Here the Act does offer a further safeguard to tenants, as the court will not accept a petition where the tenant is unable to pay their rent due to COVID-19.

Key considerations for a landlord:

• Tenants may attempt to end their leases early or claim their lease has been frustrated due to COVID-19. In the past, the courts have taken a hostile approach, in regards to finding that a lease had been frustrated, thus the chances of a successful claim are low.
• Does the lease contain a rent suspension clause? Such a clause requires an extent of damage or destruction to the premises, but it cannot be due to circumstances involving the wider economy or a material change in the tenant’s business. Since  the fallout from COVID-19 is likely to be financial, it would appear that this type of clause will not apply. Nevertheless, a landlord and tenant can come to a mutual agreement to suspend rent for a period of time. The landlord should make clear that payment of the rent arrears will be expected at a later agreed date. The tenant should be very clear about this date, because if they fail to make the payments at this later date, this could trigger forfeiture.  If landlords are able to successfully agree a mortgage payment holiday with their lender, this might persuade them to agree to some rent relief with their tenant.

Key considerations for a tenant:

• How will they manage their cash flow after the Relevant Period ends, as they will still need to meet their rent liabilities.
• Support provided by the Government such as business loans
• The lease may contain a ‘keep open’ clause, however tenants will ultimately need to comply with Government guidelines
• Can variations be made to the lease? Tenants may wish to switch from quarterly rental payments to monthly payments, as this may be more financially viable in the current climate. Both parties should ensure any variations are documented.

Things to include in such a document:

1. New rental payment terms
2. How long will these new arrangements last and what are the circumstances in which the landlord can revoke the modifications?

• Make clear that all other lease terms remain unaffected by these changes
• Tenants may be able to recover rent under ‘business interruption insurance’. This usually applies in cases where the insured party’s business cannot continue for particular reasons. The Government has made financing available to small and medium sized businesses with a turnover of less than £45 million.
• Tenants should check to see what their lease states regarding service charge. If the property is vacant, must they continue to make such payments? Additionally, if the property is unoccupied, is there a risk of the property falling into disrepair, and  the tenant will be in breach of its repairing obligations?

Most importantly, it is essential for a landlord and tenant to maintain a good relationship with one another, so both parties can have clear communication. They should work cooperatively and address any issues or concerns they may have. Both parties should also liaise with their respective insurers to see what their policy states regarding leaving the premises vacant, losses incurred as a result of disrupted business or whether a similar risk including COVID-19 is covered.

It will be important to see what happens come 30 June; will the Act by extended, and if so for what length of time?

There are many aspects for a landlord and tenant to consider, and it is vital that each individual lease is carefully considered and any concerns are brought to the other party’s attention.

*Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*