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Covid-19: practical considerations for commercial landlords and tenants

Posted: 01/04/2020

Following the recent publishing of the Coronavirus Bill, we now know that:

  • business tenancies in England and Wales cannot be terminated by re-entry or forfeiture proceedings for non-payment of rent and
  • no conduct by or on behalf of a landlord, other than express written waiver, will waive the landlord's right to re-enter or to forfeit a business tenancy for non-payment of rent.

These provisions will apply for the "relevant period", which will be from the day after the date on which the Coronavirus Bill is passed to 30 June 2020, subject to extension.

So, with many tenants likely to struggle to pay their rent and one of the strongest landlord remedies suspended, perhaps indefinitely, what should the parties be thinking about and what are people already doing in practice?  And how can we avoid a crisis in the property market both during and after the "relevant period"?

Here are six guidelines which may help:

  1. Take a deep breath, consider the medium to long term, and do not make any snap decisions

In the state of panic that has surrounded the entire world in next to no time, it is easy to see why so many snap decisions are being made by businesses and consumers alike.  But the situation is changing daily, with new laws coming into force with incredible speed and new protections being announced for different sectors of society on almost a daily basis.

So before making any decisions, landlords and tenants alike should take a moment to breathe deeply and think about the medium to long term consequences of the actions they take during what will hopefully be a short term crisis.

  1. Termination strategies

Although one of landlords' most powerful remedies for non-payment of rent will be suspended for the "relevant period", leases may still be terminated via break rights, negotiated exits, and – if the parties aren't careful – surrenders "by operation of law".

But is terminating your lease the right course of action?  In many cases, the answer will be no.

Non-payment of rent during the "relevant period" will still amount to a breach of the lease.  But landlords must remember that – unlike in ordinary circumstances – allowing your tenants' leases to continue notwithstanding non-payment of rent will not on its own amount to a waiver of that breach.  So the right to forfeit or re-enter for that breach will remain but it will not be exercisable during the "relevant period".  This means landlords do not need to take drastic action now to avoid waiving the breach and losing the right.

Tenants should also remember this point. Just because landlords cannot forfeit or re-enter for now does not mean they will not be able to do so later.  So good communication and a medium to long term mindset is key. See more on this in point three below.

So, should landlords and tenants be looking to break their leases or negotiate surrenders?

For landlords, a balance needs to be struck.  On the one hand, landlords must consider the value of their premises being let, even if your tenants are struggling in the immediate term with the cashflow impacts of the pandemic.  Rent is still payable and, if not paid, is creating a debt which your tenant must pay later. In the meantime, your tenants are continuing to shoulder liability for business rates, utilities costs and security. 

On the other hand, landlord break rights, although relatively rare, are straightforward to exercise or, if you do not have break rights, your tenants may be keen to negotiate early exits, perhaps on terms that may be attractive to you. 

Landlords with certain types of property in certain locations may see a medium-term benefit in securing vacancy now in preparation for what may be a competitive market for commercial space later.  The unknown true length of the "relevant period" and, indeed, the pandemic in general are likely to weigh into this decision.

Tenants must consider first and foremost the likelihood of their business's survival after this crisis.  If survival is anywhere from possible to relatively certain, then the loss of your place of business is likely to handcuff you once the economy begins to recover.  Plus, you must consider the cost that you are likely to face in the medium term if you need to find alternative premises in what could be a competitive market for commercial space.  For example, the future costs of surveyors and lawyers, SDLT, rent deposits and fit-out works must all be factored in.

  1. Communication and co-operation are key: agreed rent concessions?

Landlords must understand – and, of course, the vast majority do understand – the extreme cashflow pressures being faced by many tenants during this pandemic but so too must tenants consider the pressures which their landlords are facing. These range from losing their only income source, to significant devaluation of a valuable capital asset and navigating the world of mortgage holidays (perhaps for the first time). Some landlords might be facing even more serious immediate pressures than their tenants.

Communication is key to finding a route that works for both parties and hopefully strengthens the long term landlord and tenant relationship.  If you are both reasonably confident that the tenant's recovery is likely, you might consider an agreed variation to the lease terms to formally suspend or defer the payment of rent with an agreed payment plan.  If so, consider which rents should be suspended (perhaps principal only?) and whether the variation should bind each party's successors in title should the lease or its reversion be transferred in future. 

Also consider any ancillary variations. For example, if the payment plan goes beyond a break date, consider removing that break right, and consider whether an extension of the lease term is reasonable quid pro quo for the landlord helping to ease the tenant's financial burdens now.

We have already been working on these types of variations for landlord and tenant clients, so please talk to us if this is something you are considering.

  1. Enforcing against tenants' security

Should landlords be looking to withdraw money from rent deposits or make claims against guarantors?  Once again, the short term benefits need to be weighed against the medium and long term risks.

If delays in rent payments will lead to the landlord defaulting on its mortgage, then of course landlords should be looking to enforce their security.  But if the landlord could tolerate the delay relatively easily, consider the long term implications for your tenants in claiming against its guarantors now (particularly if they are individuals) or in requiring top-ups of deposits while the current crisis is ongoing.

  1. Vacancy and physical security

With the numbers of physically vacant business premises increasing on a daily basis, both parties must take care to protect the security of those premises.

Landlords: check in with your managing agents and ensure that all appropriate measures are in place to avoid physical damage being caused and to prevent any trespass which could turn into squatting, particularly with respect to unlet units.

Tenants: check your lease – do you need to notify your landlord if you will be leaving your premises vacant?  Does your lease contain a "keep open" clause? Do the current circumstances constitute an exceptional circumstance for its purposes and is it overridden by the requirement to comply with laws?

Both parties should also ensure that they liaise with their insurers (buildings, contents and third party liability) and, to avoid any nasty surprises later, provide the insurers with any notice required by those policies of the vacancy.

  1. What not to do: fraud

A final note to say that we have already heard worrying reports of transfers of properties to tenant administrators being backdated – in some cases by over six months.  This is being done in a bid to backdate the commencement date of the moratorium, thereby opening up a claim for a clawback of rent paid by the tenant.  While it should (but apparently does not) go without saying that this behaviour is fraudulent and indeed, for solicitors, it is explicitly prohibited by the Solicitors Regulation Authority’s Code of Conduct.

With the blinkers of the crisis on and the daily uncertainty as to what the future holds, it can be difficult to see the longer term effects of our actions today.  But we should all be working towards the day when the dust settles, when we can look back at our actions during this period with pride and without fear of criminal or avoidable civil liability following us as we move beyond this crisis.  As far as possible, landlords and tenants should be working with each other, understanding the pressures the other is facing, and seeking to navigate a way forward which benefits both parties in the long run.

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Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP