COVID-19 and the Commercial Lease: The Financial impact on Landlord and Tenant

Coronavirus (COVID-19) and the restrictions now in place to control its spread, are having a significant effect on many business sectors.

There are, understandably, concerns for both commercial landlords and tenants. Businesses face pressure on their financial resources and it is likely that many tenants will not be in a position to pay their rent.

Changes to rental payments

Generally, the provisions of a lease oblige a tenant to continue to pay rent throughout the contractual term. This continues to be the case if a building is shut as a result of a Coronavirus outbreak.

Increasingly tenants may seek to ask a landlord for agreement to:

• A rental holiday/rent free period.

• Payment of reduced rent.

• The ability to pay monthly.

A tenant is unlikely to be able to outright withhold payment of rent by reason of Coronavirus, unless specific provisions in the lease enable it to do so.

As most commercial leases provide for rent to be payable without deduction or set off, there is also likely to be no obligation on the landlord to agree to a concession or rent free period.

Many landlords may be prepared to discuss measures to help tenants through this unprecedented time with a view of maintaining the landlord and tenant relationship and their rental stream in the longer term. 

Documenting the rent concession

If a landlord is willing to offer a concession, then the terms for this arrangement must be clearly identified and carefully documented.

This could be by way of either a deed of variation to the lease (if changes are likely to be of a more permanent nature), or a side letter (if changes are envisaged to be of a more temporary nature).

Landlords and tenants should discuss the scope of the concession, with consideration being given to:

• The terms of any rent deferment/or reduction;

• How long the arrangement is to last.

• How much notice is required to terminate the arrangement.

• Where rent is temporarily reduced or suspended, whether the landlord expects to be able to recover the balance due under the lease at some point in the future.

• Whether the parties agree that the arrangement ends on the occurrence (or non-occurrence) of a certain event.

As an alternative, a landlord may agree to draw on some other security provided by the tenant (e.g. a rent deposit) to cover the rent arrears. This option may be useful as a quick method of recovering the debt whilst preserving the landlord and tenant relationship. It should be noted that a drawdown from a rent deposit could waive the right to forfeit the lease.

A good starting point from both a landlord’s and a tenant’s perspective is to review the specific terms of the lease and/or rent deposit deed and to seek professional advice as to the next steps.

Rent suspension for periods of inaccessibility to the property

Landlords and tenants may question who is accountable for payment of rent during a period where the property is unusable.

• Most commercial leases provide for suspension of rent following damage by an insured risk (i.e. actual physical damage to the property).

• Some leases may also provide suspension of rent in the event of an uninsured risk. Depending upon the definition of uninsured risk, the landlord may be obliged to provide a rent suspension. Where this is the case, the landlord should review their loss of rent insurance.

• Tenants should also review their own business interruption insurance to ascertain whether they can recover some of their rent (and possibly service charge).

It is unlikely that a lease will contain any provision for what happens in the event of a pandemic. Cover for this, in respect of insured risk, would only be available if the landlord’s insurer offered it as standard under its policy, which is uncommon.

In these unprecedented times, a landlord may therefore need to consider whether to accept a request from a tenant for a rent suspension.

If a rent suspension is agreed, then this should be documented appropriately, in writing.

Does a tenant have a right to terminate its lease in these unusual circumstances?

Tenants are not entitled to terminate their lease because they choose to close their business or can no longer afford to pay the rent, unless they are entitled to exercise a break clause under the terms of their lease or negotiate an early surrender of the lease with their landlord.

Most commercial leases do not contain a force majeure clause allowing a landlord or a tenant to terminate the lease or an agreement for lease, in the event of circumstances outside of their control (for example, a natural disaster).

Further protection for tenants through rent relief

The government has published an amendment to the emergency Coronavirus Bill, protecting tenants from the risk of forfeiture until the end of June 2020. This legislation will relieve a commercial tenant from payment of the March 2020 quarter’s rent and any other rent payments falling due up to the end of June 2020, effectively suspending the landlord’s right to forfeit the lease.

At the time of writing, this legislation will only delay the landlord’s right of forfeiture up to and including 30th June, so the measure should be considered as backup for ongoing conversations between landlords and tenants about voluntary arrangements on rent payments.

Know your legal obligations and commitments

It is strongly recommended to seek advice on Coronavirus (COVID-19) issues, which may arise in the context of commercial lease transactions, and how to reduce risk for either party by incorporating clauses to allow for termination, closure and/or cessation of rents.

Whether you are a landlord or a tenant, it is also important not to assume that you will automatically be released from your obligations under a commercial lease in light of public health emergencies.

This is a brief guide to the effect of the Coronavirus on rental obligations under a commercial lease and should not be relied upon as specific legal advice.

If you require further guidance regarding the effect of the Coronavirus on commercial lease terms or advice on commercial leases in general, please contact Daniel York, Solicitor, in our Real Estate department or email your query to realestate@herrington-carmichael.com; call us on 01276 686222 or visit our website https://www.herrington-carmichael.com/contact/

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.