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COMMENTARY – Commercial Property: Covid-19 – Rent Options, Consequences, and Support

Summary: A lease of commercial property is a binding contract and landlords will expect tenants to pay their rents as they fall due, including on the 25th March, despite the government advice that all non-essential retailers and premises should close. Any agreement to vary the amount of rent or when it needs to be paid, which may include a waiver, holiday, or move to monthly needs to be documented. If no agreement is reached there can be severe consequences for a tenant, losing their right to occupy, their stock, or being pushed into insolvency. It is not all doom and gloom: government measures including business rates relief and VAT deferment may help with cashflow.

Introduction

In these unprecedented times retailers including shops, bars and restaurants have seen trade come to a grinding halt and, following recent government and Public Health England advice, all retailers that sell non-essential goods have been forced to close. All non-essential premises have also been forced to close, with office workers having to work from home. This has significantly impacted upon tenant businesses.

Cash flow is now a real issue for tenants, and many will be asking whether they can or should have to pay their rent. That is particularly because the severe economic disruption caused by COVID-19, has coincided with the March quarter day. For those tenants not paying their rent monthly, a tenant’s annual rent falls equally on the usual quarter days (25th March, 24th June, 29th September and 25th December each year).

Leases are a binding contract, and absent a ‘force majeure’ clause or further legislation from government, landlords will expect the rents to be paid as they fall due. Most leases include a specific provision that the rents must be paid without deduction or set off. If the rents are not paid in full and on time, the tenant will be in breach of its lease and the landlord can take action- unless an agreement can be reached.

Today, landlords are being encouraged to take a practical and proportionate approach, and tenants hope they will do so. That said, a contract is binding, and landlords are under no obligation to vary any of its terms, including the tenant’s obligation to pay rent.

Landlords should be thinking of their tenants, and tenants should be thinking of their responsibilities under their lease to their landlords. Communication is key- whether direct, through agents, or solicitors to identify issues, try and resolve and document them, and avoid the consequences. We highlight below some of the options for landlords to consider, and the potential consequences if no agreement can be reached.

Options

1. Waiver of Rent

Landlords may be persuaded to consider waiving the March and/or June Quarter’s rent altogether. We have seen major landlords of portfolios, reluctantly, now do this. For landlords with a key tenant they don’t wish to lose e.g. an anchor tenant in a shopping centre which usually attracts footfall for other tenants, or for tenants who have otherwise always paid the rents on time.

Landlords are more likely to consider waiver where they have security, such as a rent deposit, or where a tenant is doing something for the greater good (e.g. making ventilators or providing accommodation for NHS staff). In those circumstances, a landlord may be persuaded to ‘take a view’ and keep its tenant, maintain the status quo, or allow that tenant to do what it needs to.

However, there is no obligation for a landlord to waive the rent and most have shareholders or investors to answer to. While landlords do not want to be left with empty property, for many the collection of rent is their business, and they too are being severely impacted. In the hope that tenants are able to go back to business in the coming months, most landlords will want the rents paid eventually.

In the meantime, aside from any agreement on principal rent, most landlords will expect all other payments due under the lease to be met including service charges, and insurance payments.

2. Rent holiday

Rather than an outright waiver, the landlord could agree to defer the rent for the March and/or June quarter. This could give a tenant breathing space: the chance to move operations to home or on-line or refocus generally.

That deferred rent would then need to be paid eventually, perhaps by adding them to the quarters from September/December 2020 (hoping the impact of COVID-19 will have faded by then) or beyond into 2021. Alternatively, especially where there is security, landlords may give a tenant flexibility to pay regularly, as and when it can, subject to a final date by which all ‘holiday rents’ are to be paid.

Landlords may well require financial information from tenants (such as profit figures) in order to monitor financial performance and when its tenant might be able to repay. It remains to be seen whether tenants are content to provide that information (assuming they are not already paying a turnover rent).

3. Roll forward

If the current lease is close to expiry, and in the current market, a landlord should be very concerned as to who its next tenant might be. If so, that landlord and tenant may be willing to enter into an agreement for a new lease, or a new lease, to roll forward those deferred payments. This could be by way of stage payments or as part of an overall rent review.

4. Change the frequency of payments

Landlords and tenants alike will be wondering when the current crisis might be over, and what the position could be in June and September when the next quarters rents fall due. As cashflow is so critical, a landlord could agree for its tenant to move to paying rent monthly so both parties can keep a close eye until the hoped- for improvement in the economic climate.

Documentation

Any change to the amount or timing of rent must be properly documented. Both landlord and tenant must consider and be clear of what the variation to the lease is, the consequences if that variation is not honoured, whether the agreement is personal to the parties, or is be kept confidential, and so on.

Security

Security is a key factor that will influence a landlord in varying the rent obligations. Is there a rent deposit that might cover any rent holiday or deferral? If not can the tenant or someone else within a group company provide one? Have any personal guarantees been provided and, if not, could one be considered- keeping in mind that any guarantor could be pursued for outstanding rent.

Consequences

There can be drastic consequences for a tenant if the rents are not paid as they fall due, which will be a breach of the terms of the lease. The landlord has options to pressure the tenant to pay, and if the rents are not paid may force the tenant to lose the right to occupy, their stock, or cease trading altogether.

Forfeiture

Assuming the lease contains a forfeiture provision (as most commercial leases do), the landlord could forfeit the lease by peaceable re-entry. Practically that includes going in to the property early in the morning or late at night, taking back possession and changing the locks. This ends the tenants right to occupation and so brings the lease to an end. A tenant can apply to Court for relief and to reinstate the lease- but that will usually only be granted if all rent arrears and the landlord’s costs are paid.

The government has announced protection for commercial tenants until at least 30th June 2020. However, that only delays the landlord’s right to exercise its self-help remedy of forfeiture. It does not stop the landlord pursuing an alternate route- applying to Court for an order for forfeiture and judgement for any rent arrears which will continue to accrue.

In an uncertain market, a landlord’s approach may be tempered with the risk of ending up with an empty property and having to meet its expenses e.g. business rates and insurance. However, landlords often have their own agenda and may wish to take the property back regardless e.g. to split a large retail unit into two smaller units to assist with re-letting or changing to residential use. If so, it may wish to consider other options.

Court action

If the rents are not paid as and when they fall due under the lease, the landlord could issue court proceedings i.e. sue the tenant for the rent arrears, interest and costs (and/or for forfeiture as above). Doing so takes time (useful if a landlord is thinking about redevelopment and applying for planning permission etc.) and may pressure the tenant to pay. If the landlord obtains a Court Order, it can enforce against the assets of the tenant or any guarantor.

Commercial Rent Arrears Recovery (CRAR)

Commercial Rent Arrears Recovery (CRAR) is a statutory process which allows a landlord to take control of the tenant’s goods and, if needs be, sell them. Depending on the nature of the business, a tenant’s stock may be its most valuable asset, and therefore a pressure point to ensure rents are paid. If not, the landlord can take and realise a tangible and certain asset rather than seek recovery from a tenant who may shortly be out of business.

However, at present, it should be difficult to exercise CRAR as the tenant’s premises should be closed.

Tenant insolvency

The COVID-19 crisis is likely to result in a substantial number of tenant businesses entering into a form of insolvency e.g. administration or liquidation. That may be brought about by the tenants realising they can’t meet their liabilities as they fall due or can be instigated directly by the landlord- firing a warning shot by issuing a statutory demand or proceeding straight to the presentation of a winding up petition.

Many tenant businesses are struggling, and unfortunately a number of them are likely to end up insolvent. A tenant’s insolvency practitioner will most likely bring the lease to an end. While there is a period of uncertainty for a landlord, the lease will likely be brought to an end with, at most, a few pence recovered for every pound of rent owed. For a tenant this is very much the end. If they are facing this situation they should be making early contact with their landlord.

Is it all doom and gloom?

While the contractual position under the lease remains, we have already been helping some of our landlord clients actively put options to their tenants (including suspending or waiving the March quarter’s rents with a review of the position in advance of the June quarter). Equally we have seen and helped tenants approach their landlords, including one of the major London estates to secure a waiver of the March quarter’s rent.

It is clear that the Chancellor and this Government aim to support business in this crisis. Recent measures have been designed to protect and help tenants with cashflow and so be able to pay rents as they fall due or negotiate with a willing landlord so that they can put what cash they have towards those rents. The detail and success of these schemes of course remains to be seen. However, none of them so far have stopped rents falling due, or interest accruing on them which remains governed by the contractual arrangements under the lease. Recent measures announced include:

Business Rates

The recent budget included the announcement that retail businesses with a rateable value of less than £51,000 would be exempt for paying business rates for a year. It appears that cap has now been removed, with the exemption to be extended to all retailers ‘irrespective of rateable value’ in the next financial year. Recent lobbying has called for a business rate holiday of a percentage of rates for all businesses since it seems no business or its sector is immune from the effects of COVID-19.

Not having to pay all business rates for a year should help tenants with cash flow. Those prudent tenants who had set funds aside can use those funds to put towards their rent or use them in negotiations with the landlord.

VAT Deferment

It appears that all UK businesses will be supported by and automatic deferral of VAT payments for 3 months, applicable from 20th March to 30th June 2020. This is likely to be reviewed in the coming months.

Loans/Guarantees/Grants

The Chancellor is reported to have said “any business who needs access to cash to pay rent, salaries, suppliers or buy stock will be able to access a government-backed loan on attractive terms”.

It appears that support will be offered through different schemes including, for larger businesses- a new lending facility agreed with the Bank of England, for medium and small sized businesses- a business interruption loan with no interest due for the first six months, and for the smallest business- there may be cash grants of up to £10,000.

Insurance

For businesses with insurance cover in place which covers pandemics, the chancellor has indicated that an insurance claim should be made. There is a question as to whether and how quickly those claims may be processed but the approach is supported by government. For those without insurance, it appears there may be an additional cash grant of up to £25,000 per business.

Other

Other measures included a Coronavirus Job retention scheme, statutory sick pay relief, and the HMRC time to pay scheme. As the impact of COVID-19 continues to be felt, more measures are to be expected and may be extended e.g. the period of protection from forfeiture.

These measures are being updated on a daily basis but are all designed to help those businesses grappling with today’s extraordinary market conditions.

Further information

For further information for landlords or tenants of commercial property and issues with rents please contact:

  • Benjamin Lomer at b.lomer@druces.com or +44 (0)20 7216 5570
  • Adrian Footer at a.footer@druces.com or +44 (0)20 7216 5536
  • www.druces.com/property/property-litigation