Like many other sectors, the commercial property industry has been significantly affected by the coronavirus pandemic and the subsequent Government lockdown and economic slump.
The rules around commercial leases have also been changed temporarily, to help businesses that are struggling due to the crisis, which has left landlords and property management firms with many questions.
To try and provide clarity to this ever-evolving situation, we have looked at some of the most common questions landlords have and provided answers to help them better understand the current rules regarding commercial leases.
Can my tenant stop paying rent or end their lease?
Considering the extreme financial strain that many businesses are experiencing many tenants are beginning to refuse to pay rent, ask for a reduction in rent or are seeking to terminate their lease early.
Whether a tenant can do this and on what grounds will vary from one lease to the next, depending on what was agreed under the original terms of the lease.
Landlords should review and consider:
- any break clause that allows tenants to terminate the lease early;
- any turnover provisions dependent on the income generated from the premises; and/or
- any force majeure clause.
Most leases provide for rent to be payable without deduction, meaning that tenants will not be able to withhold rent because of COVID-19, unless any specific lease provisions allow them to do so. Meanwhile, rent suspension clauses generally only relate to where a property is damaged or lost altogether due to destruction.
The common law doctrine of frustration may come in to play when it comes to terminating a lease. Tenants may try to prove that there is some form of illegality or failure of common purpose that renders performance of the lease/contract impossible or so radically different from the parties’ expectations and that termination is therefore justified.
This approach is yet to be thoroughly tested via the courts and it is not clear whether the narrow definition of frustration applies to a commercial lease. A court is not likely to relieve a tenant of their contractual obligations as the bar set for such a claim is very high.
My tenant has stopped paying rent, can I evict them?
As part of the Government’s Coronavirus Act 2020 (the Act), new measures were introduced to protect commercial tenants. Section 82 of the Act bans the forfeiture of commercial leases until 30 June 2020 for non-payment of rent due to COVID-19, thus preventing evictions.
It is not yet clear whether the Government intends to extend this period further, but it has indicated it may depend on the requirements of the lockdown period.
My property is empty, but trespassers have moved in, does this rule prevent me from evicting them?
No – this legislation is designed solely for existing tenants. If you have trespassers or squatters in your property you can still undertake a repossession order under the existing rules.
If I cannot evict them, do they still have to repay the rent owed?
Yes – despite the Government’s move to prevent evictions from commercial premises, rent arrears will still accrue and are expected to be repaid in future.
In some cases, this may be by agreement between a landlord and tenant, but in other cases, landlords may be required to seek debt recovery procedures to recover rent that is owed (be aware that some procedures have been temporarily banned). Before taking either step it is recommended that you seek legal advice.
If I can’t evict them can I take other debt recovery steps, such as a statutory demand?
The Government has temporarily banned the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions presented from Monday 27 April, through to 30 June, where a company cannot pay its bills due to coronavirus. This will help ensure these companies do not fall into deeper financial difficulty.
The Government is also introducing new legislation to provide tenants with more breathing space to pay rent by preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent.
However, the Government has made it clear that tenants shouldn’t use this as an opportunity to avoid paying or delaying a rent payment if they are not significantly affected by COVID-19.
What other steps should I be taking if I cannot use debt recovery or forfeit the lease via an eviction?
Most standard commercial leases include an obligation on the tenant to comply with all statutes and notices or orders made by competent authorities, which means that they would be in breach of that covenant if they fail to comply the Government’s current COVID-19 directions. Landlords also must comply with this and it is why you should try to work with tenants to come to a suitable arrangement.
Therefore, in the first instance, it is advised that you seek legal advice before opening up a dialogue with your tenant. Once you have taken appropriate legal advice you may wish to come to an agreement with your tenant over current and future rent payments. Depending on your own needs it may be possible to agree on how the rent will be paid in future, including a method for making up rent arrears.
I have a commercial mortgage on the property that needs to be paid, what support is available to me?
The Government has supported the buy-to-let residential sector via guaranteed mortgage holidays, however, the same support hasn’t been offered to commercial landlords that have a mortgage to pay.
Despite this, many lenders are extending similar offers to commercial landlords and it is recommended that you speak to your mortgage provider to secure a payment holiday if you require one.
I’m a landlord for a property that is in a wider shopping centre/area that is required to close as a result of the COVID-19 measures?
If a larger landlord closes a centre or any common parts, tenants and their landlords will need to check the lease as to the overall landlord’s obligations and any potential claims.
My tenant is eligible for a grant based on their business rates. However, I pay their business rates as part of the rental agreement. Can I receive the grant instead?
The grants are given to the ratepayer, who would presumably be the landlord in this case. Unless the rateable value of the hereditament is less than £15,000 (in England) the landlord would not qualify for the grant. The landlord would, in any case, need to decide whether to pass on any grants received to the tenants if an offer were made to them.
Should Tenants ‘Keep Open’ their Premises?
Some lease clauses require a business to ‘keep open’ or specify ‘operating/opening hours’. Of course, due to the restrictions that came into effect on 26 March 2020 under the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020, this is no longer possible.
Even if a business can technically remain open, this may not be possible if a business owner decides they do not wish to expose the public to the risk of infection.
Where a tenant is obliged to ‘keep open’ the premises the regulations provide a defence to the requirement if it can be established that by keeping the premises open, they will be acting unlawfully. What’s more, the courts are often reluctant to enforce specific keep open provisions to force tenants to re-open.
I have insurance on the property, could this cover the current disruption to rents?
Every insurance policy is somewhat different and so landlords should review their policy and speak with their insurance provider or broker to understand what cover is available to them.
While some policies may include business interruption cover, it is unlikely to cover much more than damage to their property or, in a limited number of cases, where Government action has meant that it is illegal for premises to remain open.
Unfortunately, cover for infectious diseases is often an opt-in extra and most will require the disease to have been classified as ‘notifiable’, which COVID-19 has been since 5 March 2020.
Business owners and landlords are finding that their policy, despite various clauses and protections, does not provide a payment as a result of COVID-19. If you believe that your insurer has taken steps to prevent you from claiming under the cover you have, you may be able to take legal action against them, so you should seek legal advice first.
How we can help
We appreciate that you may have many more questions that you wish to ask that are specific to your requirements. If you would like support with your commercial property queries, please speak to our commercial property team.