Commercial Property expert David Redgate, looks at COVID-19’s impact on existing business lease terms and answers questions he has been asked frequently by both landlords and tenants during the crisis.
Is the tenant obliged to keep paying the rent?
Yes. 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.
What if the tenant cannot pay?
To survive the crisis a business tenant might need 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. Although landlords are not obliged to agree concessions there are three options that should be considered: rent suspension, temporary rent reduction and a permanent rent reduction. The best option will vary depending on the circumstances of both parties
It is important that whatever is agreed is fully recorded in writing and it is clear that both parties agree to it. The best way to ensure that both parties have certainty and the protection they need is to take legal advice and have a formal letter or deed drawn up.
What happens if there is a rent deposit?
The rent deposit deed entitles the landlord to withdraw sums to cover unpaid rent. The tenant then has to top up the rent deposit. If an agreement for a rent reduction or suspension has been reached it needs to be clearly documented when unpaid rent can be withdrawn from the rent deposit.
What happens if the tenant stops paying the rent, OR you are a tenant that cannot pay the rent?
Forfeiture is the landlord’s right to bring the lease to an end in certain circumstances. The Coronavirus Act 2020 has temporarily amended the terms for forfeiture for non-payment of rent. Until 30 June 2020 a landlord can no longer forfeit for non-payment of rent under a business tenancy. (Mining leases, certain agricultural tenancies, short term leases of six months or less and electronic communications code leases do not benefit from the protection).
The landlord’s conduct will not be treated as waiving any right to forfeit, unless the landlord gives an express written waiver. It would be sensible for landlords to make clear in any correspondence (including emails) relating to non-payment of rent that they are not waiving the right to forfeit (unless waiver is the intention).
It is important to note that the date of 30 June 2020 could be extended and there is the power to extend it more than once.
Can the landlord end the lease under other circumstances?
Yes. The temporary amendment only relates to forfeiture for non-payment of rent. Forfeiture on the basis of an insolvency event remains. Most forfeiture clauses will also permit the landlord to forfeit in the event of a breach of other obligations in the lease, for example repair.
What action should I take if I have a break date or renewal date coming up?
Important decisions may need to be made if a break date or lease renewal date is due. Make sure you have sufficient time left before the break date to serve notice on the landlord (several month’s written notice is usually required). In terms of serving the notice, there may also be practical points around social distancing/closure of premises to consider. It is best to take legal advice to make sure any break notice is validly served.
Business tenants with security of tenure (i.e. a ‘renewable’ or ‘protected’ lease) have a statutory entitlement to remain at the property after the expiration of the contractual lease term. However, under common law, if a tenant voluntarily vacates the property at the end of the contractual term there can be an implied surrender of the lease by the tenant. Tenants must remember that if a notice is received from the landlord, to determine the lease, action must be taken to make sure the tenant does not lose that protection. If the property is closed, make sure the post is being collected.
If they wish to stay on after the expiration of the contractual lease term tenants with an ‘excluded’ lease (i.e. one without statutory protection) must agree terms for a new lease with the landlord as they will have little protection beyond the end of the lease term.
What about my rent review?
During the crisis there are obvious challenges for valuers in regard to assessing the market rent for review dates falling during 2020 and making the necessary inspections. Over the coming months valuers should be better placed to assess the impact of COVID-19 on the market. However, it is very unusual for an open market rent review to be anything other than upwards which means that the revised rent will either stay the same or increase.
Commercial leases are a complex area and this is just a general overview. If you have any specific queries, please contact me and I will be happy to help.
David Redgate, Partner, Commercial Property
DATED: 21 MAY 2020
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