Back in May we published an article on how Covid-19 is impacting commercial properties. A great deal has happened since then. In light of a possible second wave, commercial tenants face difficult questions once again. They also face the possibility of not being able to sustain their premises long-term, even if they survived the initial hit. We have updated our previous advice for the current situation.
Updated commercial property Covid-19 guidance
On 19 June 2020, the government published a code of practice for landlords and tenants of commercial property across the UK. While this is a voluntary code, it has been endorsed by organisations including the Royal Institution of Chartered Surveyors, Federation of Small Business and the British Chambers of Commerce. The main principle of the code is ‘transparency and collaboration’ and to ‘promote good practice amongst landlord and tenant relationships.’
Check your lease to see what can be lawfully done
Commercial leases vary greatly. Before doing anything, you should seek advice from a trusted professional as the wording of your lease could drastically affect the steps you should take. Certainly, don’t take any definitive action based on ‘google’ search results or informal opinion (including ours!)
Check your lease to see if there are any provisions that may assist you, such as:
- Any break clause that allows tenant to terminate the lease early;
- Any turnover rent provisions that make rent payable wholly or partly dependent upon the income generated from the premises; and/or
- Any force majeure clause (although these are rare in commercial leases and are very much ‘wording’ dependent).
Note that there may be repercussions to your insurance if you rely on the above clauses and so you must consult your insurer before taking any action.
You must also be aware of the wording that may cause you difficulty or damage. For example, some commercial leases may contain ‘keep open’ clauses and/or ‘operating/opening hours’ clauses. It is likely a defence may be available where it is unlawful to ‘keep open’. Should restrictions be lifted, the keep open clauses will re-apply.
Can I reduce or suspend rent payments on commercial property due to Covid-19?
To date, rent suspensions were not supported by government which meant that businesses have been, and continue to be, liable to pay rent. The Coronavirus Act 2020 did however offer protection from forfeiture for ‘relevant’ business tenants and this protection has been extended to 31st December 2020. So, while the rent remains legally payable, and continues to stack up as a debt, if a commercial tenant did not pay, they cannot be evicted for non-payment. “Rent” includes any sum a tenant is liable to pay under a business tenancy.
Non-payment may have serious knock-on effects such as being considered a material breach of contract resulting in a loss of security of tenure.
Where a tenant is unable to pay its rent in full, the Government is encouraging Landlords to refer to the voluntary code named above.
Can a landlord take tenant goods to settle rent arrears or file a wind-up petition on commercial property due to Covid-19?
From 29 September, the tenant must have at least 276 days’ worth of rent outstanding for the landlord to be able to exercise Commercial Rent Arrears Recovery. This will increase to 366 days’ from 25 December.
Until 31 December, no petition to wind up a company can be presented on the ground that the company has not paid sums due under a statutory demand served on or after 1 March 2020 unless the creditor has reasonable grounds to believe that coronavirus has not had a financial effect on the debtor or that the debtor would not have been able to pay in any event.
Has the stay in possession proceedings expired?
The Stay of all possession proceedings has now expired and there are important reactivation notice requirements for landlords and tenants to be aware of.
Look at your insurance policy
Many people will have turned to their insurance during this crisis and it is important for both landlords and tenants to understand their insurance position. Businesses should review their insurance policies and see how the policy may cover losses suffered as a result of coronavirus.
Some policies include business interruption cover and a recent trial case submitted by the Finance Conduct Authority has been a positive step in answering whether Coronavirus losses can be covered. This doesn’t mean to say however that your insurance will, without doubt, offer coverage but key causation issues have now been clarified by the court. Businesses may also have protection for loss where there is a notifiable disease and the government’s declaration of 5 March will assist in this regard.
What should we consider in future leases?
This is going to be interesting to monitor. It is likely that this second wave will cause more tenants and landlords to realise that we may be dealing with the impacts of covid-19 for some time. This makes our contracts more uncertain, with a greater need for flexibility for tenants and a greater need for security for landlords. Tenants will likely want shorter terms and more frequent break clauses whereas Landlords are likely to want to insist on higher rent deposits or guarantees.
We can advise commercial landlords and tenants on matters or disputes related to the ongoing coronavirus pandemic. Early legal advice can help to avoid more costly problems for both landlords and tenants. Contact us to speak to a lawyer from the business team about your situation.