We are now six months into this unforgiving pandemic – and the impact on the commercial lettings market has been profound.
The more we learn and the more our lives evolve in a Covid-19 environment, we begin to re-evaluate both where and the way that we work – and how our expectations have changed as a result.
The future of the commercial lettings market looks significantly different to how it did during the first quarter of this year. Specifically, market commentators understandably view the long-term position of occupational markets as a move away from the densification of office space.
But what about now?
We continue to receive instructions from landlord and tenant clients for advice on the effect on their obligations under their commercial lease. These issues faced by our clients over the past six months are likely to continue as government support schemes come to an end. Also, another lockdown cannot be discounted either if current Covid-19 trends continue.
We outline some of the most common issues that our landlord and tenant clients are facing:
With turnover down or obliterated, the most common issue is the payment (or non-payment) of rent. Naturally, tenants want to negotiate rent free periods, reductions, deferrals or surrenders. On the other hand, landlords want to receive payment, or at least a commitment from the tenant to pay their rent back over time.
Government guidance encourages a forum of transparent, open discussions between landlords and tenants in these situations, and we are seeing such discussions being successful. However, there are others who cannot resolve these matters in the same way, which inevitably leads to disputes.
In the absence of an agreement with the landlord, the starting point is the lease. A tenant will need to review its position and check:
- Is there a break clause which might allow it to terminate the lease early?
- Is there a force majeure clause in the lease that might assist?
- Do the rent provisions in the lease allow the rent to be linked to turnover?
The tenant will ultimately be obliged to pay the rent in accordance with the lease, and most modern commercial leases do not permit a tenant to unilaterally decide to refuse to pay rent or to pay a reduced rent.
The doctrine of frustration has also been subject to consideration, but the common view is that it would be very difficult for a tenant to rely on this. Covid-19 is seemingly a temporary hindrance to tenant obligations, which is not likely to be sufficient to demonstrate the frustration of the lease. Furthermore, there is always the option for the tenant to assign the lease or sublet the premises, which again does not support an action in frustration.
Forfeiture of leases
Prior to Covid-19, landlords had the option of forfeiting the lease where the tenant did not pay their rent. This was a strong enforcement remedy used by landlords to address issues of non-payment by tenants. However, this option been temporarily curbed by the government under the provisions of the Coronavirus Act 2020 (CA 2020), which was introduced on the 25 March 2020.
Under the CA 2020, commercial landlords are prevented from forfeiting a commercial lease for non-payment of rent. In this context, “rent” is defined as any amount payable under the lease so will include service charges, insurance rent and utilities.
Such measures remain in place until 30 September 2020, or until such later date as may be specified. We do not currently know if the deadline will be extended – so watch this space.
Nevertheless, there are other means available to a landlord to recover rent arrears; including a claim on any rent deposit held, a claim against a guarantor, or a court claim or recovery from a sub-tenant under Section 81 of the Tribunals, Courts and Enforcement Act 2007.
Keep open clauses
It is not uncommon for leases of retail premises to include a keep open clause. As a result of the national and local lockdown measures that have been implemented over the past six months, it has been impossible for retail tenants to comply with such clauses.
Even as restrictions have eased and premises were permitted to re-open – this does not automatically offer a resolution, as the premises might not be very well suited to deal with necessary social distancing measures, and tenants do not want to re-open as a result.
The regulations introduced under the CA 2020 to deal with the forced closure of premises will most likely offer a defence to tenants who are subject to alleged breaches of such clauses. However as restrictions ease, and if the regulations no longer apply to the tenant’s business, then it is likely that a landlord will have better grounds to enforce such keep open provisions again.
We are, and will be in the future, living in a very different environment than before. Landlords and tenants need to understand their legal obligations, and now is the time more than ever for landlords and tenants to engage with each other and work together. If there are commercial solutions that both parties can work with, then these should be fully explored.
If parties cannot reach an agreement, then they should consider avenues of alternative dispute resolution before embarking on court proceedings. Indeed, there may be a dispute resolution clause in the lease which the parties can follow.
The information above is not and should not be taken to be legal advice, and you should not take action or omit to take action based on this information.
David Quinn is a Managing Associate in the team of specialist Property Litigation lawyers at Ince. He regularly advises commercial tenants and landlords in relation to lease management issues and strategies.
If you require any help on the issues raised above please contact:
David Quinn, Managing Associate, Cardiff
T: 029 2167 2707
E: [email protected]