COVID-19 and the impact on commercial leases

The impact of COVID-19 is being felt by almost every person and every business. The sheer speed with which this virus has taken the world in its grasp has left people and business having to catch up rapidly on how it is going to affect them and how they are to react. Government guidance is changing by the day on how we must conduct ourselves and what support there is available personally and for businesses.

This article aims to address how COVID-19 is, and may in the future, affect commercial leases and offers some thoughts and guidance on how to deal with common issues that may arise.

Rent

With today marking one of the usual rent quarter days, consideration will need to be given by landlords and tenants as to how this payment is (and possibly future payments are) dealt with. Tenants may consider asking landlords for a rent holiday, perhaps for the next rent quarter or (if rent is paid monthly) for the next month or few months. Landlords will need to consider whether to accept such a request and if so, it is advisable to set the terms out in writing in a side letter signed by all parties. Key points to consider are:

  • How long will be rent holiday last for?
  • Is the rent to be deferred (holiday) or waived (never paid for the period in question)?
  • If the rent is to be deferred, when will it be payable and on what basis (i.e. will it all be paid together on the next rent payment date or will it be paid in instalments over time?
  • Is the landlord to charge interest on the outstanding rent and if so at what rate?

Alternative options to agreeing a rent holiday or deferment may be a short term reduction in rent.

Landlords may also receive requests from tenants to defer service charge payments. In addition to any points referred to above, consideration will need to be given as to whether any outstanding payments are to be reconciled on the next payment date or at the end of the service charge year etc. Much will depend on how the service charge is calculated and whether it is fixed or paid on account.

In agreeing any deferment, holiday or reduction, it is advisable to set the terms out in writing in a side letter singed by the parties (including any guarantor). A deed varying the lease may be an alternative option but timescales are unlikely to permit this being a viable option in most scenarios. Landlords will need to consider whether the side letter should bind their successors in title, particularly if the dates for any deferred rental payments to be made are not for some time or whether the letter it to be personal between the parties.

Unless intended, any side letter should make it clear that any deferred/reduced payments are not being waived and the terms of the lease are not being varied.

Whilst a physical letter signed in wet ink by all parties would be preferable, it is likely that such arrangements will need to be put in place quickly and this may be conducive to electronic confirmations. Emails can create a binding contract and could be used as an alternative method albeit with caution.  

Use

We are seeing a number of businesses, particularly in the food and hospitality sectors, trying to adapt their businesses in order to keep trading. Typical examples are cafes offering a take away service. Whilst a lease may (for example) permit the use of the property as a café, this may exclude takeaway food. There may also be planning issues to consider, as the property may benefit from a planning permission for use as a restaurant under Use Class A3 of the Town and Country Planning (Use Classes) Order 1987 (as amended) but not Use Class A5 (hot food takeaways). Some changes from one use class to another are covered by 'permitted development' rights (meaning that planning permission is deemed to have been given) but this does not (again for example) apply to changes from A3 to A5 (although it does from A5 to A3).   Tenants will need to consider whether they would be in breach of covenant by changing use or even if the landlord grants such permission and this is documented satisfactorily, whether in any event, this would be contrary to planning legislation.

Forfeiture

Non-payment of rent is one typical reason where a landlord may take steps to forfeit a lease. However, the government has recently confirmed measures whereby commercial tenants who cannot pay rent due to the impact of COVID-19 are to have protection from forfeiture until 30 June 2020. These measures, included in the emergency Coronavirus Bill currently going through Parliament, will mean no business will be forced out of their premises if they miss a payment in the next 3 months. However, please note the Coronvirus Bill is not yet in force and will not take effect until it receives Royal Assent, which is widely expected very shortly.

Considerations

There will be a number of points for landlord and tenants to consider in deciding how best to deal with the impact of COVID-19 on commercial leases. Whilst there are legal aspects to consider, there will also be a number of commercial aspects to consider. The unknown timescale of the COVID-19 outbreak does not assist landlords or tenants but if one thing is certain is that one day, this period will pass and the impact of decisions made by landlord and tenants now and in the near future may be felt long after life has returned to normal.

 

Posted on: 25/03/2020

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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