Working from home has become the new normal for many firms over the past eight weeks. But as the government prepares to lift lockdown restrictions, the spotlight is beginning to fall on the long-term impact of the Covid-19 crisis, with unoccupied business premises being a major casualty.
The widespread shift to remote working models and offices set up in employee homes is likely to lead to many business owners questioning the need for expensive offices.
Some estimates suggest that commercial rents in some areas of the UK may fall by as much as 20 per cent by the end of this year. These reductions look set to bring about a re-gearing of the bargaining power between landlords and tenants, in favour of tenants.
Harper James commercial property solicitor Christen Mulingani comments:
‘Landlords are likely to find themselves with a rapidly increasing number of empty units or defaulting tenants. They will need to weigh up the costs of being flexible and riding out the crisis with the implications of taking a hard-line approach to new lettings or enforcement action.’
Here Christen offers advice about the immediate impact of Covid-19 and what landlords and tenants should bear in mind when considering their existing lease arrangements and any that are currently being negotiated.
Top points for tenants
- The main purpose of the commercial property provisions of the Coronavirus Act 2020 is to give the tenant protection against forfeiture (the landlord ending a lease due to a tenant breach) against the backdrop of the current government lockdown. If you are a business tenant under a lease, an agreement for lease or periodic tenancy (either express or implied), then you should benefit from these measures. Exceptions do apply though, so be sure to check with us if you are facing action from your landlord. The legislation provides that during the period 26 March-30 June 2020 (subject to extension), the landlord’s right of re-entry or forfeiture for non-payment of rent may not be enforced by action or otherwise. ‘Rent’ in this context extends to any payment under the lease including service charge, insurance premiums and any other payments reserved. There is no requirement that the tenant’s failure to pay the sums due must be as a result of Covid-19.
- Despite this new coronavirus legislation, tenants must remember that rent continues to accrue and remains payable during this period. Withholding of rent even in circumstances where the tenant is unable to operate its business will likely be a breach of the lease terms. Tenants should speak to their landlords about rent suspension or payments at shorter intervals. In order to make such a clause legally binding rather than an unenforceable indication of intent or ‘comfort’, then speak to us about drawing up a simple Deed of Variation.
- The Coronavirus Act 2020 addresses the landlord’s ability to forfeit only. It does not prevent the landlord from taking advantage of any other type of enforcement action permitted by the lease. The use of rent deposits will be attractive as these are funds immediately available to the landlord. For the tenant, there is generally an obligation to immediately top up the deposit balance, which offers them no reprieve from the accrual of arrears. Tenants should therefore try to negotiate appropriate provisions extending the date by which the reimbursement of deposit monies has to be achieved and ensure that any concessions are properly documented. Any personal guarantors of tenant obligations should also brace themselves for landlords to take action against them to make good any tenant breaches.
- If business operations have closed temporarily, tenants should check the terms of their lease carefully. In particular:
- Check for a keep-open clause (usually retail premises only). In these unprecedented circumstances, it is highly unlikely that courts would construe any action by the landlord for breach of this clause as enforceable, particularly where the shutdown is directly as a result of the government legislation or guidance. The position is less clear where the closure is more indirectly due to the pandemic. As there is potential for dispute, it is probably wise to raise and discuss with the landlord as early as possible.
- Check the insurance policy and ensure compliance with terms. Most leases will impose this as a direct obligation on the tenant even where the policy is implemented by the landlord. For premises that have become unoccupied due to government restrictions, some insurers are relaxing their policy requirements for the time being, but the onus is on the tenants to check the position and keep the landlord informed of any non-compliance.
- Check the position on void business rates relief. This was originally intended to be a tenant benefit, but most landlords insist that any relief used by the tenant is refunded to the landlord at the end of the term.
- Tenants who are about to enter into a new lease are in the best position to take advantage of the current uncertainty when negotiating their rent and rent review provisions. Check with a solicitor to ensure that any new rent review clause contains provision for a downwards review, perhaps subject to a minimum figure, in the event that market rents fall significantly over the next five years. Existing tenants with a rent review pending, are likely to have an upwards-only review provision which means that the best they can hope for is a nil increase on their current rent. In order to maximise the tenant’s bargaining position, early action is essential. They should check their lease for a break option, most of which are designed to coincide with the rent review date, and approach their landlord in good time to discuss expectations as to the new rent or any additional lease terms they require. Cautious landlords may be inclined to be more flexible rather than risk losing a good tenant.
Top points for landlords
The general decline in the retail market is likely to continue and perhaps accelerate as a result of Covid-19. Similarly, we are already seeing many tenants reassessing their need for larger working spaces – and in some cases, any office at all. Landlords are likely to have to make concessions during the negotiation process that they would not have considered a couple of months ago. Flexibility on rent review (ie accommodating downwards reviews) and more opportunities for tenants to terminate or dispose of the lease may be expected. Incentives for securing longer contractual terms might become necessary.
- If a landlord is considering enforcement action against a defaulting tenant, it is vital that they take legal advice so as not to prejudice their position. Whilst the Coronavirus Act 2020 suspends all forfeiture action until the 30 June (or as extended) and specifically provides that no conduct on behalf of a landlord is to be regarded a waiving a right of re-entry or forfeiture for non-payment of rent, landlords should exercise caution if they want to preserve their rights to forfeit the lease once the suspension period ends. Courts are likely to take an approach that is sympathetic to tenants.
- A landlord can enforce the right of re-entry for breach of covenants not connected with payment of rents (most often failure to repair). Where the lease terms permit the tenant a reasonable period of time to remedy the breach or give vacant possession, the landlord should have regard to the impact of the Covid-19 outbreak on the tenant’s ability to comply. Again legal advice should be taken.
- With regard to other enforcement options, currently, there are no restrictions on the landlord’s rights to:
- Claim for debt, mesne profits (ie rent for the any additional periods of time where the tenant remains in occupation outside the contractual term of the lease) or damages
- Drawdown of rent deposit
- Claim against quarantors
Using rent deposits is likely to be the most attractive option as these are funds immediately available. However, if the tenant is struggling to pay their rent, the likelihood of them being able to top up the deposit is low, so this may only be a short-term solution.
- If the landlord is obliged to (or chooses to) incur additional costs as a result of Covid-19, for example, related to deep cleaning or regulatory compliance, they should check the service charge provisions in the lease to ensure that these costs can be passed on to the tenants. Most leases include a ‘sweeper clause’ for unexpected or unforeseeable expenditure. If new leases are being granted, then other pandemic-related factors to consider are provisions to cover possible delays in landlord works prior to completion, due to:
- disruptions to supply chains or labour resources
- the introduction of government reliefs and power
- concessions like discounted or deferred rents
- force majeure provision
The requirements will be case-specific and careful consideration is needed. One of the main things for landlords is to ensure is that where any concessions are made and then government assistance is given to the tenant, it must be declared to the landlord with reimbursement made where relevant.