updated on 17 November 2020
QuestionHow might a landlord take a commercial approach to the issues faced by existing and new commercial tenants during the pandemic?
From 23 March 2020 to 14 June 2020, the forced closure of all 'non-essential' businesses, including the majority of retail outlets, meant that many commercial tenants were left struggling to afford their rent. In addition, the lockdown impeded the ability of many tenants to comply with their usual covenants (obligations imposed by their lease). The unavailability of services – such as those provided by electricians and removal companies – prevented tenants from adhering to their obligations to repair or even hand back their premises at the end of their leases.
As England is now in a second lockdown, the issue of how property owners and commercial tenants should approach the sticky subject of rent arrears, rent concessions and breach of covenants may once again come to the fore.
Existing tenancies and rent arrears
The government is keen to promote collaboration between landlords and tenants, in order to mitigate against the 'income shocks' of lockdowns. On 19 June 2020, a voluntary 'code of practice for commercial property relationships during the covid-19 pandemic' was published, which encourages the parties to consider themselves as 'economic partners' and to act reasonably and responsibly when it comes to enforcing the terms of a lease.
The government has bolstered this voluntary code with legislation protecting the majority of commercial tenants from eviction due to unpaid rent:
Although the above legislative measures have been brought in to assist tenants during this period of uncertainty, tenants still remain liable for their rent under their tenancy agreements.
However, many landlords have taken a commercial approach to their tenanted premises and have worked with their tenant to agree a payment plan for any missed rent. This may include a 'payment holiday' whereby rent is not payable for a specified amount of time, or a rent concession period where the usual amount of rent due is reduced. There are several factors which a landlord may wish to consider when contemplating entering into a payment plan:
The final agreement reached will be the result of negotiation and pragmatism toward the unchartered territory that both parties have found themselves in. A landlord may consider that the benefits of a tenanted property (even with a tenant paying reduced or no rent) outweigh the liabilities of an unoccupied premises, including: possible future liability for business rates; insurance and security costs for an empty premises; and utility charges for keeping the building in good shape with heating and ventilation.
A landlord seeking to negotiate a new lease with a prospective tenant may consider providing for the scenario of another lockdown or mitigating against other effects of covid-19 in the lease itself.
A 'pandemic clause' could set out the procedure to be followed in the event of a lockdown (or similar measure) providing a degree of certainty for both parties. Such a clause could:
Taking a collaborative approach to the initial negotiation of a commercial lease may assist in setting the tone for the remainder of the business relationship. The additional security gained from clarifying the procedure to be followed in the event of a lockdown, and reducing the likelihood of a dispute or the tenant defaulting on payments completely, may mean that a landlord is willing to agree clauses that provide the tenant with more flexibility than would otherwise (normally) be acceptable. However, the willingness of institutional landlords to inject flexibility may be fettered by the attitude of commercial property investors and the market conditions.
Lydia Robinson is a solicitor at Michelmores. She is based in the firm’s specialist real estate team.