COVID-19: Impact on commercial landlords and tenants
The medical impact of coronavirus (COVID-19) has been well documented, but as many businesses brace themselves for financial hardship, how will it affect commercial landlords and tenants?
The outbreak is already affecting British businesses. The UK’s financial markets have suffered heavy falls and we’ve seen the first high profile business casualty of coronavirus, with homeware retailer Laura Ashley calling in administrators.
Despite the Government introducing a swathe of financial measures to protect the UK economy, we’re likely to see further businesses suffer in the coming weeks and months as consumers stay at home and spending habits change. Here, we provide a Q&A addressing some of the common concerns arising for both landlords and tenants of commercial premises.
The upcoming 25 March ‘quarter day’ is likely to be significant for many commercial tenants who pay rent quarterly, and for businesses struggling with cash flow, making this payment may be a challenge.
I’m a commercial tenant and anticipate having difficulties paying my rent. What are my options?
Simply walking away from your liability to pay rent is rarely an option. Force majeure clauses, which act to vary or end commercial contracts, are unlikely to be relevant in a landlord and tenant relationship, and you will remain bound by the terms of your lease.
There is a very high bar for proving that a lease has become ‘frustrated’ (broadly defined as an unforeseen event which renders contractual obligations impossible). In normal circumstances, any failure to pay rent will almost certainly entitle your landlord to make a claim against you for breach of lease. Most leases do not permit the tenant to withhold rent in any circumstances.
However, in the Coronavirus Bill which is currently going through Parliament, the Government has announced that commercial tenants who cannot pay their rent because of coronavirus will be protected from eviction. The proposed Bill confirms that no right of re-entry or forfeiture may be exercised by a commercial landlord for failure to pay rent during the relevant period, which is defined as being from the date the Act is passed until 30 June 2020, but this could be extended.
Tenant’s should note however that the Coronavirus Bill appears to address forfeiture for failure to pay rent only. There does not appear to be any provisions that prevent landlords from recovering rent by other forms of enforcement i.e. CRAR or service of a statutory demand.
If you are a tenant who is struggling to pay rent, you should talk to your landlord to discuss changing payment schedules, particularly if rent is paid quarterly. While your landlord is not likely to be obliged to vary these terms, they may see the benefits of doing so, particularly in view of the fact that as a tenant you will be protected from evicition.
As a landlord I’m concerned about losing rental income
If a tenant fails to pay their rent, the lease would usually allow you to pursue the tenant for the money, forfeit the lease and regain possession of the property, bringing the lease to an end. However, the Government announcement that commercial tenants who cannot pay their rent because of coronavirus will be protected from eviction, means landlords cannot commence forfeiture proceedings for failure to pay rent, during the relevant period, which is defined as being from the date the Act is passed until 30 June 2020, this could be extended.
This proposed legislation does not appear to apply to other breaches lease, including failure to pay service charges. However, it is also not yet clear how the courts will respond to claims against tenants who have been impacted by coronavirus and judges may act more leniently towards tenants, given the current situation.
Further, the proposed legislation provides that no conduct by a landlord, other than giving an express waiver in writing, is to be regarded as waiving a right of re-entry or forfeiture, for non-payment of rent. This means that you cannot be considered to have waived your right to forfeiture for failure to pay rent, and will be able to enforce the terms of the lease once the crisis has passed (subject to any changes in legislation).
Even if you can, it may be unwise to forfeit a lease and evict tenants; the property could be left vacant, resulting in a loss of income while facing the difficult prospect of finding a new tenant. Additionally, you may become liable for any business rates (subject to any changes in legislation) and other expenses which would normally be the tenant’s responsibility, such as payment of utilities and insurance, once the lease has come to an end.
Agents are reporting that some of their landlord clients are offering rent holidays or postponement of payment with a view to assisting their tenant. It is important for you to consider each matter on a case by case basis. If you have a Rent Deposit, you may be able to deduct rent shortfalls directly from this initially, and this could help cash flow in the short term with a view to allowing the tenant to ‘top up’ the rent deposit over time.
As a tenant, will I be liable for increased service charges associated with deep cleaning communal areas as a result of coronavirus?
This will depend largely on the terms of your lease, but it is probable that a landlord can levy additional service charges to cover the extra costs associated with arranging for the deep cleaning of communal areas to mitigate the spread of disease. Check your lease to see what charges your landlord can make you liable for.
What steps should we take if we are closing and our premises will remain unoccupied for some time?
If you have taken the decision to temporarily close your business, or will have no staff physically present at your premises, you will need to make provisions for receiving post.
You may receive notices from your landlord or pursuant to your commercial contracts or even court paperwork, which require a response or action within a very limited time frame. In many cases a notice sent pursuant to a lease or court claim will be validly served even if you are not at the premises to receive it, particularly if they are your registered offices at Companies House.
You should ensure that appropriate arrangements for the collection of post are in place. This could include having someone regularly attend the premises to collect post or arranging for post to be redirected by Royal Mail. Check that your lease or contracts allow for you to provide an alternative address for service.
If your registered office address is that of a third party (such as your accountant or solicitor for example), check what measures they have in place to receive post.
If you need to serve a notice or are in receipt of one, we suggest taking appropriate legal advice on your options.
Keep open clauses
I am a commercial tenant with a ‘keep open’ clause in my lease. Do I need to stay open?
If the Government has advised or enacted legislation to reduce opening hours, it is unlikely you will be in breach of a ‘keep open’ clause in a commercial lease. In any event, most leases place an obligation on the tenant to comply with all statutory or Government requirements.
It is worth noting that the Government has announced measures to protect residential renters and landlords affected by coronavirus, including:
- Emergency legislation to suspend new evictions from social or private rented accommodation.
- No new possession proceedings through applications to the court to start during the coronavirus crisis.
- Landlords will also be protected with a 3 month mortgage payment holiday extended to buy to let mortgages.
For more information on the steps taken by the Government to protect residential landlords and tenants, read the Government’s advice here.
If you are a commercial or residential landlord or tenant and want to discuss your concerns about the effect of coronavirus on your business or home, please fill in the enquiry form or get in touch with our expert Property Litigation team.