Commercial Leases and the impact of the coronavirus (COVID-19)
Adam Riley, 15th May, 2020
Many businesses either operate their enterprise from premises which are held pursuant to a commercial lease; or are based around the commercial letting of premises. The current socio-economic landscape, and the new and novel situation in which we all find ourselves, has raised a swathe of questions for both landlords and tenants in respect of their commercial leases.
In the absence of an express break-clause, or a cooling-off period which is still exercisable, both landlords and tenants are going to be bound by the terms of their leases. In the vast majority of cases, these leases will not include any provisions relating to the suspension of rent (and any other payments due and owing under the lease) during any period of closure (notwithstanding that some leases will include ‘keep open’ clauses). As the effects of the coronavirus pandemic on the country have become more and more profound, landlords and tenants have found themselves having to try to strike an often very delicate and challenging commercial balance between their respective needs and obligations.
The Government have, on the heels of the requirement placed upon many non-essential businesses to close, issued blocks on commercial landlords serving statutory demands or winding-up petitions against tenants who fail to pay their rent due to the impact of the coronavirus. These provisions, and their impact, are explored more fully by my colleague Farhana Choudhury in her blog ‘Commercial landlords banned from aggressive rent collection’. In addition to this, the Government have also established the Coronavirus Job Retention Scheme (with a confirmed extension of this scheme to October 2020 being announced by the Chancellor on 12th May 2020) allowing employers to claim for staff who are placed on furlough during the pandemic. This scheme, and the practicalities of claiming under it, are discussed in another blog entitled ‘Tales from the Portal’ by head of Employment, Ted Flanagan.
It is also worth noting that many commercial tenants may be able to apply for assistance under the Government’s Coronavirus Business Interruption Loan Scheme (CBILS); and/or make claims under either the Government’s Small Business Grant Fund; or the Retail, Hospitality and Leisure Grant scheme. Gosschalks have already successfully assisted clients in commencing their claims under these schemes and they can all provide valuable support to a business’ cash flow during a period in which money may not (certainly not in the volumes it was prior to the pandemic) be flowing into the business. You can read more about the support we can provide in relation to CBILS in our recent blog by Nigel Beckwith.
Notwithstanding the support and assistance which is on offer, the sudden imposition of forced closure, and the profound effects that this has had across almost all sectors, has been felt by both landlords and tenants alike.
Now, with the announcement on Sunday 10th May of a framework for returning the UK to ‘business as normal’, it is a critical time to engage with any issues which may be facing you as either a landlord or a tenant (or even both). Cashflow will be key for every business to survive and this is important to tenants and landlords alike. Being proactive, and ensuring that you are best placed to re-enter the trading world with your commercial affairs in order, can give you the best possible chance of preserving the long-term strength and success of your business.
This is a time where communication will be the key for many. Collaborative and constructive engagement can often bring about the most effective and mutually beneficial results.
The key factor to remember is that there are always options. Since the effects of the pandemic started to be felt, we at Gosschalks have already helped a number of both national and local clients in negotiating a variety of different packages in order to enable both landlords and tenants to be in a position to exit this situation successfully. The first hurdle, no matter the size of your business and whether you are a landlord or a tenant, is to open up an effective (and cordial) line of communication. It is always the case that reaching a solution through agreement between the parties will both limit the expenditure of costs; and will preserve the landlord-tenant relationship.
Once an agreement (or framework agreement) is in place, it is vital that any documents to be drafted and entered into are accurately and effectively drafted and that the relevant legal considerations are made. These considerations can range from issues such as whether any deed may effect a surrender and re-grant (and the associated considerations of SDLT liability, registration at HM Land Registry, etc this may bring); to whether the documents themselves will effectively bind the parties to the agreements which have been reached in a manner which can, if required, be enforced.
There are a broad range of measures which can be proposed and entered into between landlords and tenants, both permanent and temporary in their effects, and here are just a few of these (and this is by no means an exhaustive list – this is just to get you thinking):
A full rent holiday. This involves the landlord accepting that, for a fixed period of time, no rent will be payable to them under the lease. This option clearly has a major impact upon the landlord as this means that the landlord is, in effect, bearing the entire economic brunt of the situation (with regards to the lease monies payable).
A rent deferral. This involves the landlord and the tenant agreeing that the rent payable under the lease will not be payable between two fixed dates but that, rather than this rent being waived by the landlord (as is the case with a rent holiday), the outstanding rent will then collected (in addition to the rent and any other monies owing to the landlord at that time under the lease) across a fixed period in the future. This option allows a tenant the relief from rent for a fixed period (and the associated cash-flow benefits arising therefrom) while also protecting the landlord from simply losing the rental monies payable for that period.
A ‘rent-for-term’ agreement. This involves a landlord and a tenant agreeing that, in return for a rent holiday, the tenant will extend their lease for a specific period of time. This will mean that, while the landlord will bear the immediate financial impact, the tenant is offsetting this by guaranteeing the landlord their income for an extended period of time.
Temporary variation of terms. This can mean many things dependant upon the lease in question and the business being operated form the relevant premises. It may be that the parties are happy to temporarily amend the rent terms to allow for turnover based rent payments for a fixed period; or it may be that certain elements of the lease may be varied for fixed periods in return for rental holidays (either full or partial).
Lease surrender. This option involved the ending of the lease, which can be done in a number of different ways in order to be legally effective. This is by far the most severe and final option but may, in certain circumstances, be the most practical and mutually beneficial option for the parties. It is important to note however that, once a surrender is affected, the lease has come to an end and therefore, in the absence of any unlawful conduct, the tenant has lost any and all rights under that lease. It is also very important to note that agreeing to surrender will not necessarily mean that any debts which have been accrued under the lease, or any liabilities (such as dilapidations) which are outstanding, will have be waived. It is essential that landlords seek legal advice if they are contemplating accepting a tenant’s offer to surrender their lease as there are matters that should be checked first which, if not properly dealt with, can have dire consequences for the landlord.
Clearly, with regards to the above options, there is not a ‘silver bullet’; nor will one approach be suitable for all those parties affected by the coronavirus pandemic. This is why we are keen to highlight the value of constructive dialogue and engagement between landlords and tenants.
Here at Gosschalks we have a strong and pragmatic commercial property team with many years’ experience, ready to help you at every step of the process where we can be of assistance – from suggesting and exploring the potential agreements to be entered into; to drafting, completing and registering (if required) the legal documentation to record any agreements reached.
Want to learn more about how we can help?
If you're interested in speaking to us to establish how we may be able to help you and your business, get in touch today for a no obligation chat with our personable and experienced team. Key contacts:
Adam Riley on 01482 590272 / 07949 132934 or by email - email@example.com
Mark Teal on 01482 590279 / 07774 241358 or by email – firstname.lastname@example.org
Charlotte Chilcott on 01482 590222 / 07875 561473 or by email – email@example.com
Alternatively, any member of our Commercial Property team is on-hand to assist as we're all working at full capacity.