April 3, 2020

Commercial leases, rents and the Coronavirus Act 2020

Commercial property solicitor, Natasha Narad, discusses commercial leases and rents during the Coronavirus outbreak.

Last week, fast food giant Burger King announced that they would not be paying rent to landlords on the quarter due day, owing to the COVID-19 epidemic. Indeed, Holmes & Hills Solicitors has had it confirmed by managing agents in the region that a material number of commercial tenants are communicating with agents about options regarding rent payments in the short-term.

The issue is not though limited to landlords and tenants of retail and leisure premises, which have been forced to close. Businesses occupying office and industrial/warehouse space are also experiencing financial pressure as the economy rapidly and dramatically shrinks.

The lease, the forfeiture clause and the Coronavirus Act 2020

The terms of every lease will be unique and so leases should be considered individually and with specific legal advice from a commercial property solicitor. This article is a discussion around common elements, and clauses in the context of the current situation, as opposed to advice in any form.

Under a lease, there will be an obligation on the tenant to pay the rent to the landlord or managing agent. The majority of commercial leases will contain a forfeiture clause which provides the commercial landlord with the right to end the lease and re-enter the property where rent is not paid for a period specified in the lease (often 14 or 21 days). In these circumstances the lease is forfeited by the landlord issuing Court proceedings or by peaceably re-entering the property (the latter usually undertaken by bailiffs to ensure correct protocol is followed and the landlord’s legal position is not impinged).

However, Section 82 of the Coronavirus Act 2020 (The Act) (which received Royal Assent on 25th March) prevents commercial landlords from forfeiting leases or re-entering premises during the ‘relevant period’ on the grounds of non-payment of rent. The ‘relevant period’ currently ends on 30th June 2020, but The Act contains provision for the relevant period to be extended should the Government decide this is necessary at some future point as part of its ongoing support for businesses and the economy.

What does this mean for commercial tenants?  

Tenants are not going to find themselves evicted from their premises against their will for not paying rent, not during the ‘relevant period’ at least. It is important to remember however, that rent not paid during the ‘relevant period’ is still owed and due to the landlord. It is not recommended that a tenant simply not pay rent. This will negatively impact the tenant’s legal position and would likely increase the risk of the landlord re-entering at the end of the ‘relevant period’ (30th June at the time of writing) or taking some other form of action (potentially insolvency action) to recover the debt. It is also likely to cause the landlord to be less open to coming to some form of arrangement with the tenant regarding rent (as temporary as that may be).

Communication is key

Communicating with the landlord or managing agent is essential. Each landlord will make their own independent decisions as to how to approach the situation of a tenant in financial distress and being less able to pay rent over the coming months.

In response to large numbers of tenants making approaches about rent, many landlords appear to be taking a pragmatic view, with managing agents reporting one of three common approaches being taken:

  • Agreeing to a deferment of rent for a period of three months, in some instances six. In these situations landlords and tenants are agreeing that rent is not paid for a given period, but for this amount to then be spread over an equal future period (three or six months) in addition to the regular rent payment that would be due at that future point.
  • Agreeing to a temporary reduction in rent for a given period.
  • Not agreeing to a deferment or reduction. Clearly, if the tenant is unable to pay the rent at the rate specified and as it falls due, the landlord would need to be considering the action they might take at the end of the ‘relevant period’ and potentially in the interim in order to recover the amounts owed, notwithstanding the inability to re-gain possession.

Impact on break clauses

Tenants whose commercial leases contain break clauses may consider breaking their tenancy and ending the lease as a viable strategic move in releasing themselves from the expenditure of rent. Break clauses will either:

  • Be rolling - providing for exercise of the break clause at any point during the term of the lease or during a specified period of the lease term, or
  • Specify a single date or several dates during the course of the lease term when the clause can be exercised by the tenant and/or the landlord.

For those tenants looking to exercise break clauses, it is important to note the need to adhere to the strict procedures, form of notice and dates which surround the clause, as contained within the lease. Failure to adhere to the requirements of the clause may void any break notice and may cause the ‘right to break’ to be lost. It is recommended that any tenant considering exercising a break clause speak with a specialist commercial property solicitor at the earliest opportunity, to ensure exercising the break clause is properly considered and the opportunity to break is not lost.

It is common for leases to specify certain conditions be met in order for a tenant to exercise a break clause. One such condition is likely to be that the tenant has paid all rent and other payments due under the lease. Break clauses can vary as to whether it is required that the rent is paid up to date at the point the break notice is served, or paid up to date as at the date the lease will be broken and comes to an end. Therefore, if a tenant is intending to exercise a break clause, it is important that rent is paid in full as it falls due.

If a tenant comes to an agreement with the landlord which includes deferment or reduction in rent for a period and the tenant has a break clause in their lease which they may wish to exercise at some future point, it is important that the temporary agreement between the two parties does not risk the tenant losing the right to break. Whether this risk exists depends on the drafting of the break clause within the lease. If this situation applies, it is recommended legal advice be sought so that the tenant’s future legal position is not compromised.

A further common condition of break clauses is that tenants provide for vacant possession on the date the lease is to be broken. This is an important consideration at the current time given restrictions on movement. If a business owner is not able to organise for equipment, furniture, materials, stock or any other items to be removed from the premises, vacant possession cannot be provided to the landlord and the terms of the break clause are not met. Again, the risk here is that the tenant’s opportunity to break the lease is lost and the liability for rent continues until the next opportunity to break or the end of the lease term.

Get specialist advice on protecting your position:

Whether you are a commercial landlord or commercial tenant, it is likely you have not faced before the situation which you face now. If you would like the advice and guidance of a specialist commercial property solicitor as you consider your options and how best to protect your business and your legal and financial position, both during the ‘relevant period’ and following, contact the Commercial Property Department at Holmes & Hills Solicitors on 01376 30456 (Essex) or 01787 275275 (Suffolk).

Holmes & Hills’ team of commercial property specialists is recognised as one of the leading legal departments in the region for the supply of advice and representation by the Legal 500 – an independent directory of the UKs leading law firms and solicitors.

Holmes & Hills' new commercial hub

Holmes & Hills new head office will shortly be opening in Marks Tey, Colchester just off the A12. The A12 commercial hub will provide a  flexible and modern base for Holmes & Hills' commercial legal teams, including its Corporate and Commercial, Commercial Property, Planning and Development, Litigation and medical litigation departments.

Key Contact

Natasha Narad

Solicitor

NN@holmes-hills.co.uk

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