Industry Insights

Options available to landlords and tenants for commercial leases due to the Coronavirus pandemic

1st April 2020

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.

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 – no change

  • 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 (CRAR) – These are all still available to landlords although they although they will be of less practical use where a tenant is genuinely in financially difficulty. CRAR is a process by which the Landlord can, following written notice, enter the leased premises and seize goods to the value of the outstanding principal rent (not service charge and insurance rent).

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.

Posted by:

Edward Watson

Paris Smith LLP

02380482482

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