14 Jul 2020
High profile business failures have sent shockwaves through the commercial property sector. More are likely to follow with businesses finding themselves insolvent and unable to continue trading.
Post lockdown, businesses will need to look at their long term viability in this time of crisis. With commercial premises costs being one of the largest fixed cost for any business, it is imperative that landlords and tenants work together constructively to enable them to continue trading. At the outset, parties need to fully understand their rights and obligations under the lease that governs their relationship to ensure they continue to comply with their obligations and do not inadvertently breach the lease in these uncertain times.
Landlords may be concerned about incurring costs for additional cleaning and social distancing obligations in communal areas. They will want to know if these costs are recoverable. Tenants may have concerns about having to comply with obligations which cannot be complied with for example a covenant to stay open.
Professional advisors will be able to direct and assist parties to try and achieve business continuity and explore various options with them. Some landlords may wish to take enforcement action against a tenant for non-payment of rent. In relation to enforcing the The Coronavirus Act 2020, it is recommended that landlords seek advice from a solicitor at the earliest opportunity, due to the Act having short term enforcement. In particular, landlords would be wise to consider any tenant’s ability to pay any sum due as a result of enforcement action and whether there would even be a new tenant available for vacant property.
To try and overcome an impasse in the landlord and tenant relationship, during the last financial crash of 2008, many landlords and tenants entered into confidential written agreements (side letter to a lease) to reduce rents. It is now time to revisit this process to assist business continuity as we move out of lockdown. This process would involve the parties agreeing a rent free period, deferment of rent or rent reduction. Landlords and tenants may have already agreed these changes to rent payment or proposing such a change. Either way, it is imperative that any agreement is formally documented as it will have an impact on the other terms of the lease.
The commercial property sector has already seen a move to a turnover rent model and it may be the case that this will become far more common in the future when considering the current market volatilities.
If you want to read more about our advice for businesses as lockdown is lifted, take a look at our handy guide for businesses.
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