How can business tenants negotiate a rent reduction for premises closed by COVID-19?

Can’t afford to pay the rent on empty premises?

Many business premises are now empty due to Coronavirus restrictions, especially in the retail, leisure and hospitality sectors.  These businesses may be unable to pay the rent while the restrictions continue.

What can tenants do if they are struggling to pay the rent?

Your legal rights

The lease will usually provide for rent to be paid quarterly in advance. Most likely, the rent remains payable whether or not you continue to occupy the premises.  However, The Coronavirus Act 2020, in force from on 25 March 2020, protects business tenants from eviction for non-payment of rent.  Your landlord may not re-enter or forfeit your lease from 26 March 2020 until 30 June 2020 or such longer period as may be specified.

Check if your lease allows closure where it is no longer possible to stay open due to force majeure events, which should include closure due to the Covid-19 virus.  However, such a clause is not usually inserted in commercial leases.

If you have a turnover rent clause in your lease, check if there is a penalty for closure in breach of a “keep open” provision. Occasionally, leases allow the landlord to charge a penalty of say 25% of the basic rent or a rent based upon average daily turnover for days closed.

One possible legal argument if you are unable to occupy your premises is that the terms of the lease have been “frustrated”. Frustration arises where, due to a change of circumstances through no fault of the parties, the obligations under the lease can no longer be performed. This would be a difficult argument to establish in law and there are no reported court decisions upholding this doctrine for leases.

If your lease contains a break clause then you will of course consider whether to exercise this. However, care must be taken to check the terms for the valid exercise of the break option which may include paying all rent due up to date.

There remains the opportunity in most leases for the tenant to assign or sublet which will usually require landlord’s consent which may not be unreasonably withheld.  Finding another tenant to take over the premises in the current climate is likely to be challenging given the glut of empty commercial properties.

Negotiating points

Tenants should communicate with their landlord and try to negotiate in order to alleviate their situation.  What can you ask your landlord to do?

• Since your landlord still has the right to demand the rent due, try and agree a suspension or waiver of rent for a period of time. Alternatively, you could try asking for a rent reduction e.g. 50% reduction for a fixed period.  If this cannot be agreed, then try asking for a moratorium for say 3-6 months or for the rent to be deferred until a later period.   Remember, your lease is likely to provide for interest to be paid on rent not paid in time, usually at the rate of 4% above bank base rate.  Consider negotiating over this.
• Consider asking for the rent to be converted either temporarily or permanently to a turnover-only rent so that the landlord receives a percentage of the tenant’s turnover or net profits. That way the benefits from the trade can be shared.
• If you pay rent quarterly in advance, ask to pay quarterly in arrears instead or to pay monthly if this will assist with your cash flow.
• If you are able to reach an agreement in principle make sure this is confirmed in writing and your landlord agrees not to take legal action while you are adhering to the terms of the agreement. Remember that in the absence of an agreement, a landlord could take proceedings to recover arrears of rent in the courts against the tenant and any guarantor under the lease, or could take commercial rent arrears recovery action by taking control of the tenant’s goods.  Alternatively, the landlord could serve a statutory demand and threaten insolvency proceedings if payment is not made within 21 days.
• Consider negotiating a surrender of your lease which would enable you to be released from future obligations. The landlord may seek a premium to compensate them for future loss of rental.

How strong is your negotiating position as a tenant?

Given the large number of vacant properties and the number of businesses likely to go into insolvency, many tenants will be negotiating from a position of strength.  A landlord will have to consider the prospects of being left with vacant premises for a considerable period of time, the costs of having to carry out any improvements in order to relent, the costs of reletting, the costs of ongoing rates, and perhaps a share of service charges and repairs and maintenance for a long period of time.

Each area and building is different so you should assess the likelihood of the landlord wanting to take back the premises.  There could be a risk that the landlord has its own agenda for wanting to bring your lease to an end, perhaps in order to redevelop the property or occupy it for their own use.

Other possible financial reliefs available to tenants of commercial premises

• Business rates holiday for retail, hospitality and leisure businesses during the 2020/21 tax year.
• A cash grant of up to £25,000 per property for businesses in retail, hospitality and retail sectors. Those businesses with a property with a rateable value of up to £15,000 will receive a grant of £15,000 and those with a rateable of value of between £15,000 and £51,000 will receive a grant of £25000.
• Empty rate relief.
• Check the terms of your business insurances to see whether a claim for business interruption or the like can be claimed.

Our expert commercial property solicitors will be pleased to advise you. Please contact Alan Zeffertt on aze@anthonygold.co.uk or another member of our Commercial Property Team.