With pressure to close from government, leasehold premise tenants are increasingly anxious about the fall-out from Covid-19. The retail and leisure sectors are historically subject to commercial leases and with no rental equivalent of the ‘mortgage holiday’, they are unsure how closure will impact their business. While the information below comes from a ‘typical’ standpoint, the lease itself will dictate exactly what can be done.
Check your lease.
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!)
What if you are required to stay open under the lease?
Your lease may require your business to stay open with the exception of ‘legal need’ to close. For many businesses within the leisure and tourism sector, closure is mandated in law and so would fall under this exception. Check if you are mandated to stay closed here https://www.gov.uk/government/publications/further-businesses-and-premises-to-close/further-businesses-and-premises-to-close-guidance.
If there is no express provision to allow for closure in light of legal need, the landlord will likely face difficult in enforcing clauses mandating that you stay open against the law. This isn’t a risk free strategy – the landlord may still claim for damages (subject to the circumstances of closure) and particular care needs to be taken as costly penalty clauses are common in this regard. Try and seek agreement on closure.
Can I reduce or suspend rent payments?
It is unlikely that the government will introduce rent suspensions and you are still liable to pay rent. However, the Coronavirus Act 2020 offers protection from forfeiture for ‘relevant’ business tenants. This prevents landlords either from effecting or enforcing forfeiture until 30th June 2020 (or longer if the government determines), for non-payment of rent. “Rent” includes any sum a tenant is liable to pay under a business tenancy. The landlord could still issue a debt claim and serve of a statutory demand, but most court proceedings are likely to be delayed due to the pandemic as of 23 March 2020, all winding-up petitions are adjourned for a minimum of three months. Despite this, businesses should think twice about refusing to pay rent and seek advice in this regard.
You must also be aware that failure to pay rent or any other material breach of the lease could result in you loosing security of tenure.
Points of negotiation
Your financial wellbeing will often be in the landlord’s interests – especially for tenants with longer term leasehold interests. If you go insolvent, this may leave the property vacant and cause financial uncertainty for the landlord. In any communications, be unemotional and pragmatic. Explain the risks and rationale behind any proposals such as a payment plan, moratorium of rent or temporary rent reduction.
Top tips of what to do next for commercial tenants.
- Speak to a trusted adviser on what you are legally obligated to pay and whether any break clauses or termination clauses give you the opportunity to walk away liability free.
- Communicate with your landlord.
- If advised to do so, propose a reasonable payment plan / moratorium for a limited period explaining why this is in the parties’ interests. Also draw to the landlord’s attention that they may have a mortgage holiday available to them.
- Record all correspondence and agreements in writing.
- Making sure that variations or side letters are drafted in an appropriate manner to avoid future litigation and liabilities.
- Be sure to deal with any deposit in your negotiations as a shortfall in rent may allow a landlord to rectify that shortfall through deduction from deposit.
- Check your insurance policies for cover in respect of losses due to viruses or legal restriction.
- If a ‘common-part’ is closed by the landlord, you may be justified in seeking a reduction or suspension of service charges relating to that ‘common-part’.