DATED: 22 APRIL 2020
In the first of a four part series, Commercial Propert expert, Amy Husk looks at issues arising from a commercial lease which may affect both landlords and tenants during the COVID-19 crisis.
Continuing obligation to pay
Despite the crisis, the tenant’s obligation under the lease to pay rent continues. There is no right under the lease to have the rent suspended in this situation, most leases do not include a force majeure clause and the common law principle of frustration is almost impossible to apply to leases
What if the tenant cannot pay?
It might be that, to stay afloat and weather the storm, a business tenant needs a reduction or suspension of the rent. It is in the best interest of both landlords and tenants to come to an amicable agreement to put the tenant in the best position to trade once restrictions are lifted. However, landlords are not obliged to act in good faith.
So what are the options?
- Rent suspension: ie the tenant pays no rent until a set date and the then full rent becomes payable again from that date
- Temporary rent reduction: ie the tenant pays a reduced rent until a set date and then the full rent becomes payable again from that date
- Permanent rent reduction: ie the landlord agrees a reduced rent until the next review date or end of the lease term.
The best option will vary depending on the circumstances of both parties. In the case of a permanent rent reduction the landlord must consider what the effect will be on rent review and on any lease renewal.
Commercial Property team
How should the agreement be dealt with?
- It is really important that whatever is agreed is fully recorded in writing and it is clear that both parties agree to it.
- If the intention is that the rent is permanently reduced and the landlord does not want to recover the difference in rent then a deed of variation is the best option to ensure the reduction is fully effective as a variation to the lease terms.
- If the arrangement is intended to be a temporary one, it should still be recorded in writing. Ideally this should be in a letter signed by both parties. If this is not possible, an email chain setting out the agreed terms and showing that both parties have agreed to it would be better than a verbal agreement.
The best way to ensure that both parties have certainty and the protection they need is to take legal advice and to have a formal letter or deed drawn up.
What other points need to be considered?
- How long is the agreement intended to last for? Consider a set date or a clearly definable event following which the rent will revert to its previous level.
- Is the landlord expecting the tenant to repay the unpaid rent or shortfall in rent at a later date? If so, make it clear when and how this is to be repaid.
- Is interest to be payable on the outstanding rent? If so is this at a default rate or base rate (these rates will be defined in the lease)?
If there is a rent deposit, the rent deposit deed will entitle the landlord to withdraw sums to cover unpaid rent. The tenant will then have to top up the rent deposit.
If an agreement for a rent reduction or suspension has been reached it would be wise to also document how that will interact with the rent deposit deed so that both parties are clear on when unpaid rent can be withdrawn from the rent deposit.
For further information on this or other commercial propety issues you may be facing please contact a member of our Commercial Property team who will be able to advise you from both a landlord and tenant perspective.
To find out more about other issues concerning a commercial lease during the COVID-19 crisis, read more at:
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