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25th April 2020

Coronavirus (COVID-19) and commercial leases

25th April 2020

Coronavirus (COVID-19) and commercial leases

Edward Watson

Posted: 25th April 2020

T: 023 8048 2243

E: Email Me

Due to the Coronavirus pandemic tenants with commercial leases are having a difficult time and consequently landlords too. We know anecdotally that some tenants with large portfolios have already approached their landlords and agreed rent concessions.

Options available to landlords and tenants for commercial leases

This blog explains the implications of the Coronavirus Act for commercial leases and provides some of the options available to landlords and tenants. For residential tenancies please read our separate blog.

Rent concessions

  • Tenants have no automatic entitlement to rent reductions or rent holidays on commercial leases. Of course, the commercial backdrop presented by the current situation will lead many landlords and tenants to agree concessions between themselves: landlords are generally keen to see that their tenants get through the current extremely difficult period and they will be aware that it could be a struggle to re-let premises in the short/medium term.
  • Some tenants will take unilateral action and landlords will have to decide for themselves how to respond, having regard to the commercial backdrop and to their legal position. The legal position is changing in some respects with the passage of the Coronavirus Act.

Forfeiture and the Coronavirus Act

  • The Coronavirus legislation prevents landlords from initiating forfeiture for non-payment of rent until 30 June 2020. This is called the “relevant period”.
  • The relevant period may be extended by the government.
  • Rent includes service charge and insurance rent – not just the main rent payable under a commercial lease.
  • The probability of an extension to the relevant period must be considered high since tenants are unlikely to have been trading (or at least not trading so successfully) in the second quarter of 2020. Many tenants will therefore continue to be financially stressed and unlikely to be ready to resume paying rent after 30 June 2020.
  • Whilst the right to forfeiture is suspended by the Coronavirus legislation any acts of the landlord that would normally amount to an all time waiver of the right to forfeit for existing arrears will not be regarded as waiver. So a landlord can continue to demand rent, issue proceedings and generally take other enforcement action without fear of waiver.
  • Forfeiture proceedings brought for reasons other than non-payment of rent are not affected by the Coronavirus legislation. The option for landlords to forfeit on the ground of tenant insolvency will continue although we must expect that the courts will be more willing to consider relief from forfeiture in the current climate.

Remedies other than forfeiture

  • Rent deposits – Landlords are still able to draw on any rent deposit in accordance with the terms of the rent deposit deed.
  • Guarantors – Landlords can still call on a tenant’s guarantor whether under a lease or an authorised guarantee agreement.
  • Interest -Interest on unpaid rent will still accrue and be payable by a tenant in accordance with the terms of the lease.
  • Debt claim, statutory demand and Commercial Rent Arrears Recovery (the process, known as CRAR, by which a landlord can, following written notice, enter the leased premises and seize goods to the value of the outstanding main rent) – Since the start of the crisis, these measures will have lost their practical effectiveness against tenants in genuine financial difficulty. Following a government announcement on 23 April we understand that legislation is to be brought forward which will restrict further the actions that landlords can take. Specifically the forthcoming Corporate Insolvency and Governance Bill is expected to make the following provisions:
    • The use of statutory demands made between 1 March 2020 and 30 June 2020 will be banned.
    • Winding up petitions may not be presented and winding up orders will not be made from 27 April 2020 to 30 June 2020 where a company is unable to pay its debts because of coronavirus.
    • Landlords will be prevented from using CRAR unless the main rent is unpaid for at least 90 days.
  • The new legislation is expected to be effective initially until 30 June but this may be extended together with the moratorium on forfeiture under the Coronavirus Act.

Lease renewals

Under the Coronavirus legislation, landlords cannot rely on non-payment of rent during the “relevant period” to oppose a lease renewal under the Landlord and Tenant Act 1954.

Break rights

Break rights on commercial leases often come with conditions. Tenants should be aware that if they are unable to vacate premises owing to the lock-down then this could result in a break right being lost. Similarly, arrears of rent could endanger the operation of a break right.

Landlord’s loss of rent insurance

  • Landlord insurance policies generally only protect landlord’s rental income where there has been physical damage to a property. It is unlikely to be relevant where a tenant stops paying rent for Coronavirus-related reasons.
  • We would recommend that a landlord’s insurance policy is checked to see if there is reference to “pandemic or epidemic” as an insured risk. This would be unusual. If it is covered then it is possible that the rent suspension provisions of the lease will be engaged.

Tenant’s business interruption insurance

Tenants should speak to their insurers but, again, business interruption insurance would normally only apply where there has been physical damage to a property.

Force majeure

It is rare to see a force majeure clause in a modern lease, however that is not to say they don’t exist. These clauses are more commonly found in agreements for lease, development agreements and commercial contracts. If you do have a force majeure clause in your agreement then you should review it carefully and seek advice.

Frustration

Frustration allows an agreement to be set aside where an unforeseen event makes it impossible for the parties to perform their obligations. Technically a lease could be frustrated. The bar is very high, though, and we are not aware of any cases where a lease has been found to have been frustrated.

If you have any queries relating to any of the issues raised above or indeed any other commercial lease queries please email Edward Watson, David Eminton or Nicola Davies.

Our dedicated “Coronavirus – Legal advice and guidance” page contains advice and guidance on matters affecting, businesses, employers, self-employed, employees, planning legislation, property etc. and is regularly updated as and when new guidance comes in from the government or other regulated bodies.

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2 Comments

  1. Loris Gurnah

    I rent a church hall where I operated a partime pricate nursery during term time only. for children age 2 to 4 yerars. All the childed are government funded. we were forced to close 0n 20/3/20 following government guidance.
    The church wants to charge rent for the period of closure. Is this right? should the rent be negotiable for the same period?

    Reply
    • Paris Smith

      Dear Loris

      Thank you for your enquiry. In the absence of any terms in your agreement with the Church that allows for a rent reduction then they are entitled to charge you for the period you are closed. The government is encouraging parties to try and negotiate/reach a settlement and so we would recommend that you explain your circumstances to them and see if they are willing to reduce/delay rental payments until you are open again. You may find they are prepared to compromise as it would be in their interests for you to be able to open and continue to pay rent once the restrictions are lifted.

      Reply

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Edward Watson

Posted: 25th April 2020

T: 023 8048 2243

E: Email Me