Commercial Landlords, COVID-19 (Coronovirus) & the LawChelsea Brooke-Ward
Chelsea Brooke-Ward a Barrister in the Commercial and Chancery team at Park Square Barristers discusses the most frequently asked question “can commercial tenants withhold rent?”, and the likely affects and outcomes for commercial leases and landlords
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There has been an unprecedented challenge to the nation following the recent measures adopted by the UK and the most recent “lock-down”, no one knows what the future holds at present but what appears to be clear is that as the coronavirus pandemic continues to spread, commercial property owners are attempting to pilot those unprecedented challenges and are faced with increasing encounters economically. Most landlords are becoming increasingly concerned about the outbreak and how it is likely to impact their businesses and property portfolios, and what safeguards are in place to assist them.
The main question frequently being asked is…….. “Can my tenant withhold rents payable under the lease?”
This will be entirely dependent upon the construction of the lease in question and the clauses contained therein. Given the current situation and the Government announcement, most tenants will be seeking a rent holiday/deferral or a rent reduction. Modern commercial leases only provide for a suspension of the applicable rent if the premises are damaged, destroyed or unusable due to an “insured risk” – and more often than not this would not include a coronavirus outbreak. Cover for this would only be available if the landlord’s insurer offered cover as standard under its policy terms, which is extremely unusual. If there is any ambiguity as to whether you are insured your policy schedule and wording would be the first port of call before calling your insurer. If you are unsure what your insured risks are, and the exclusions I would advise to obtain expert legal advice.
If the matter on the face of it is an uninsured risk (as I suspect COVID-19 will be) the tenant will in almost all cases, still be liable to pay their rent absent any agreement with their landlord to the contrary (discussed below). However, new protective measures have been outlined by the Government which will mean that no business will be forced out of their premises if they miss a rent payment in the next three months.
At this stage, the Government’s proposal is only expected to delay a landlord’s right to forfeit and not eradicate this entirely. So, as things currently stand a landlord may after the three-month period ends, seek to enforce the forfeiture clause so commercial tenants will still be liable for the rent during and after this period. It would be advisable to write to tenants and
explain the situation. The government has also made clear that it is monitoring the impact on landlords’ cash flow during this time, but at the time of writing no clear guidance has been given in respect of this particular issue.
So in light of the Government proposal that no landlord will be able to evict commercial tenants for a period of 3 months, which at the current calculation no commercial landlord would be able to enforce any forfeiture clause before 30th June 2020, commercial landlords are faced with reality that tenants may not be able to pay their rent or may simply be refusing to pay their rent.
So, where does that leave a commercial landlord?
Whilst there is no obligation on landlords to allow tenants such rent relief, it is in both parties’ interests to try and work together to agree a compromise to the current situation. Landlords will need to evaluate their current financial situation and decide whether they are willing to agree to a rent suspension/reduction/deferment. If there is an agreement to suspend or reduce the rent for such a period, this will constitute a variation to the express terms of the contract, and it would be advisable that this should be reduced to writing and agreed by both sides. I would advise that expert legal advice should be obtained on the effects of such a variation to the contract. Once such an agreement has been reached between the tenant and the landlord, this will then become a binding variation to the contract. This may be for example to extend the current operating period of the lease for the duration of the rental suspension or agree a payment plan in addition to the current rent once the three months (or any such period as agreed) has lapsed.
Although the above maybe the stand point for the majority of commercial leases, some leases may provide that the rent is suspended in the event of an “uninsured risk” occurring and the lease will need to be carefully reviewed in light of the current pandemic to see whether the particular clause covers such events, but in my experience it would be extremely unusual for such a clause to be in a commercial lease.
If the lease does not provide for a rent suspension, I reiterate that a landlord is not obliged to accept such suspension. However, landlords should give careful consideration as to whether to accept such requests having regard to the relationship and economic impact on their business and that of their tenants.
If you are considering agreeing to a rent suspension or reduction, a carefully drafted agreement should be prepared. If you wish to discuss this or any further matters then please do not hesitate to contact our team on email@example.com or call 0113 245 9763.