29 Oct 2020

Commercial Property

Coronavirus and commercial leases – advice for landlords and tenants

With the spread of Covid-19 continuing to create challenges for businesses across the country, we’ve had several enquiries from our commercial landlord and tenant clients as to how the ongoing pandemic may affect their agreements regarding their business premises. Our associate commercial property solicitor, James Young, answers some of the most common queries we’ve received.

It is no secret that businesses up and down the UK, and indeed the world, are facing huge challenges right now, as the coronavirus crisis shows no signs of abating any time soon. One of the key issues for companies is that their buildings are sitting empty as the majority of employees continue to work from home. In these uncertain times, it is essential that land owners and occupiers in all sectors understand the implications for their property-related rights and liabilities.

Q: As a tenant, can I refuse to pay my rent or terminate the lease prematurely?

A: The first thing you need to do is review the terms of the lease. Most commercial leases will provide for rent to be payable without deduction or set off so a tenant is unlikely to be able to withhold their rent payment for any reasons relating to the pandemic, unless there is specific provision in the lease which allows them to do so. The only option in these circumstances would be for the tenant to reach an agreement with the landlord.

Some leases may have a break clause that may allow the tenant to terminate the lease early or a turnover rent provision that is dependent upon the income generated from the premises. There may also be a force majeure clause but these are rarely found in commercial leases and there is no common law right to terminate for force majeure.

Q: As a landlord, can I evict the tenant if they don’t pay their rent?

A: The government announced back in March, as part of the emergency Coronavirus Act 2020, that commercial landlords were to be prohibited from forfeiting commercial leases and evicting the tenant for not paying their rent. This measure has been extended to 31 December 2020. Where a tenant is unable to pay its rent in full, landlords are being encouraged to follow the Government’s voluntary Code of Practice.

In most cases, it would be advisable for parties to consider the commercial and reputational risks, alongside the strict legal issues, and restructure rent payment schedules or debts so as to preserve relationships, even where there is no legal right or obligation to do so. Given the sudden and negative impact on cash flow for most tenants, the most sensible option might be to agree practical and commercial solutions to try and navigate the coming months.

If any alternative arrangements such as these are agreed, it will be important for both parties to ensure these are properly documented and accurately reflect both parties’ intentions and understanding.

Q: As a tenant, what can I do if I can’t afford to pay my rent and my landlord is not willing to enter into an agreement that will help?   

A: Check your lease to see if it contains any mandatory dispute resolution provisions. An effective dispute resolution clause requires the parties to follow a pre-agreed route to resolution, which can prevent ant potential secondary dispute about whether and how the primary issue should be resolved, minimise the scope for any tactical game playing and ensure that the time and costs of dealing with formal litigation are only incurred as a last resort.

Unfortunately, if all other avenues have been explored, some tenants will be left with no option but to seek urgent rent concessions, lease surrender by agreement or some form of administration or other insolvency process.

It is important to understand your legal obligations and commitments, act responsibly and not to assume that you will automatically be released from these even in light of current circumstances.

Q: To make our workplace Covid-secure, we need to make some changes to our premises and pay for additional services. Who will need to cover these costs?

A: Broadly, the landlord remains liable to provide, and the tenant remains liable to pay for, services in accordance with the express service charge provisions that are in the lease.

The majority of premises are currently having to undertake enhanced cleaning regimes to make the workplaces safe and this obviously incurs additional costs. Whether or not the landlord will be able to recover these costs from tenants will again depend on the terms of the lease. Generally speaking, most service charge provisions include the recovery of cleaning costs. Alternatively, a landlord might be able to rely on any ‘catch all’ provision regarding costs associated with good estate management.

Q: How do you think future lease agreements will be affected by the coronavirus crisis?

A: It will be interesting to see how the market reacts to the crisis, when it is finally over. I expect there will be all sorts of new clauses that parties will seek to negotiate going forward, to account for the commercial risks that may arise from any future public health crises or other unexpected, significant events.

The commercial team at Harding Evans Solicitors has a wealth of experience dealing with all aspects of commercial property law, as well as dispute resolution between landlords and tenants, should any issues arise. This is merely a high level summary of the key concerns currently facing commercial landlords and tenants. If you would like to explore any of the issues raised here in more detail or have any other queries, please contact James Young on 01633 244233 or email hello@hevans.com.

 

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