Apr 20

COVID-19: Impact of Coronavirus on commercial property leases

Written by John Carter
Associate

DDI: 01423 724620
E: john.carter@raworths.co.uk

The coronavirus pandemic is creating huge problems for both tenants and landlords of commercial properties.  The unprecedented lockdown means that most commercial tenants have seen their income hit, and many tenants have been forced to close their properties down (particularly in the retail and hospitality industries).  As tenants struggle to make rent payments, landlords find themselves facing shortfalls in income, which creates a knock on effect for those landlords who rely on the rental income to make mortgage repayments to their lender.

The Coronavirus Act 2020 states that up to 30^th June 2020 landlords cannot forfeit/end commercial leases due to non-payment of rent by the tenant.  (The government may decide to extend this beyond 30^th June.)  It is reassuring for tenants to know that, for now, their lease cannot be ended for non-payment of rent, although any unpaid rent will continue to accrue and remains payable.

Generally speaking, it is in the interests of both tenants and landlords to ride out the current crisis together, and get back to normal as soon as possible.  Tenants do not want to be forced out of their properties and landlords do not want to be left with empty properties that are likely to be difficult to let in the immediate future.  With this in mind, if a landlord is willing to assist its tenant who is struggling to pay rent, there are a number of possibilities:

1. Rent deferral: the landlord agrees to accept lower rent (or even nil rent) for the next, say, 3 or 6 months, with the outstanding rent to be repaid in instalments over the remainder of the term of the lease.
2. Rent deposit: if the landlord is holding a rent deposit from the tenant, the landlord can use this towards the next rent payment(s), with the tenant to top-up the rent deposit down the line.
3. Rent payment dates: the landlord could agree to accept monthly rent rather than quarterly rent to help the tenant’s cash flow.  Commercial leases usually have rent payable monthly or quarterly “in advance” – a landlord may agree to temporarily accept rent payable “in arrears” instead.
4. Exchange for services or goods: the tenant may be able to provide the landlord with services or goods in exchange for rent relief (tax advice should be taken on any such arrangement).
5. Exchange for giving up rights: if, for example, a tenant has a break option in their lease (i.e. a right to terminate the lease early), they could agree to give up their break option in exchange for rent relief.
6. Enter into a brand new lease: this could benefit both parties if, for example, the new lease has an initial rent-free period (helping the tenant in the short-term) but the term of the new lease goes beyond the term of the existing one (so the landlord has the security of a longer lease).

If an agreement can be reached then it is advisable to properly document this through a side letter or side agreement.  Landlords will require the prior approval of their lender for certain options, for example, entering into a new lease.  If landlords are unwilling or unable to find a mutually beneficial arrangement with their tenant then there are ways that landlords can look to recover unpaid rent.

It is difficult to make commercial decisions when there are so many uncertainties with the current situation.  We do not know how long the lockdown will last nor how long it will take for businesses to start getting back to normal.  We also do not know what future assistance may be provided by the government to landlords or tenants of commercial properties.

However, for now there does seem to be a feeling that “we’re all in it together,” and hopefully commercial tenants and landlords (and lenders) can work together to get through this crisis.