(co-written by Tamsin Simmonds, Edward Watson and Henry Barker)
In this blog we look at issues landlords and tenants should consider in lieu of the Coronavirus (COVID-19) including deferring obligations in a commercial lease. We also consider the importance of properly documenting any such agreements to avoid costly and unintended consequences. This blog follows on from a recent post that looked at the implications of the Coronavirus Act for Commercial Leases.
Practical issues for landlords and tenants and lease concessions
We give guidance here on some issues we have recently advised landlord and tenant clients on.
Lease term expiry
Is a break date approaching, or contractual expiry due? Whilst a tenant obligation to pay rent may be about to end in these scenarios, certain obligations (i.e. to remove contents and hand the property back in a reasonable state of repair and condition) will extend beyond the term. Physical restrictions on movement may make compliance impossible and the parties should consider how they can practically deal with such issues. Advice should be sought on documenting any agreement that is reached – see below for some tips:
- Temporarily moving out of premises: landlords and tenants should work together when considering premises closure to minimise arguments that lease obligations have been breached. A collaborative approach can also help premises re-open and resume normal business as quickly as possible when government restrictions are lifted. Make sure that you think about issues such as:
- notifying your insurers that the premises are temporarily unoccupied;
- providing a forwarding address so that important notices (such as those served under a break clause) are actioned inside of time limits; and
- practical measures like draining down the water supply, sealing up letterboxes, arranging security inspections and so on.
- Tenant concessions: landlords and tenants may wish to take legal and/or surveyor’s advice in relation to their options as early as possible and certainly before any agreement is reached (see more on this below). Some examples include:
- rent deferment – some institutional landlords have deferred or even cancelled March quarter rents to allow tenants some breathing space and help them survive the crisis. Many landlords prefer to agree reductions or deferments now rather than risk tenant insolvency and ranking as an unsecured creditor at a later date. Some landlords see “rent deferments” as similar to using rent free periods upfront to entice tenants in a limited market;
- service charge reductions –physical restrictions will severely hamper a landlord’s ability to provide certain services and facilities. As part of any deal to suspend any such services, tenants will want to ensure that their obligation to pay is also frozen or at very least, reduced. This will depend in large part on how service charge provisions are drafted in the lease;
- changing from quarterly to monthly rent payments and from payments in advance to payments in arrears to help with cash flow and budgets. Turnover rent may also be an option; and
- variations to “normal opening hours” and “keep open” covenants to reflect restricted trade periods (including hourly slots reserved for key workers or the elderly).
Documenting Concession Agreements
What parties can achieve in terms of a concession will come down to the terms of their existing lease and respective bargaining position.
If, for instance, a tenant has a break date fast approaching and a landlord is keen to keep them in situ then they are likely to secure more favourable terms for a rent deferment – perhaps a permanent decrease or a lengthy period for the concession. In return, a landlord might seek to remove the break altogether, or push it back a few years when the market has hopefully recovered and a new tenant can be found. Contrast this with a tenant who has just signed up to a 10 year lease with a break on the fifth anniversary (or none at all). A tenant in this case is less likely to achieve a permanent or lengthy deferment.
Professional advice in these scenarios can help landlords and tenants understand their respective bargaining strengths and secure them as strong a deal as possible. Legal advisors should then formalise the parties’ intentions in writing to avoid any scope for dispute.
The following points should be considered before drafting any such agreement:
- If deferring rent, will you want any other payments (such as service charge or insurance rent) to be suspended as well?
- How long will the concession last? Should the landlord be able to serve notice on the tenant when the pandemic has ended (perhaps with a dispute resolution procedure if the tenant disagrees), or will the parties need the certainty of a fixed end date for the concession?
- If tenants have a break right, they should be wary of any condition to pay rent as this might scupper their ability to validly exercise the right. They should also pay close attention to any pre-condition requiring vacant possession or removal of contents – will this be possible if the country is still in lock down?
- Unless the parties agree the concession is to be permanent, tenants will want to ensure that it is disregarded on rent review to avoid an unintended impact on the amount payable at a future date.
- Will interest be charged on late payment? Will you expect any deferred amounts to be repaid with interest in any event?
- Will non-payment or late payment mean the whole amount becomes due?
- Is consent of a superior landlord or lender required?
- Is there a guarantor that should be a party?
Getting it Wrong
It’s crucial that any agreement is clearly documented in writing to avoid arguments at a later date.
A landlord’s conduct by itself when granting concessions may be taken as a permanent variation of lease terms. This could prevent the landlord recovering the full amount due once the pandemic has ended. Worse still, the variation could apply to any review of the rent, or carry across into the terms of a renewal lease and have a long lasting and unintended effect.
Our page “Coronavirus (COVID-19) – Legal advice and guidance” is continually being updated with advice and guidance as and when updates come in from Government or other regulatory bodies.