A recent analysis of 10,000 retail, industrial and office properties by software firm Re-Leased in relation to the lockdown and its impact on landlords and business tenants shows that business tenants have still to pay almost 50% of the country's quarterly rent bill which fell due in March.
The study shows that only 54% of commercial rent had been paid by the 20th day after it fell due on March 25. The dip in payments from about 79% in a normal year may result in bankruptcy for some commercial landlords.
The government recently introduced a three-month moratorium on evictions of commercial tenants (until June 2020) to protect tenants, but some landlords have accused tenants of withholding rent which they could afford to pay and of using the pandemic as an excuse to evade rent payment. Some other studies have shown that some tenants have been labouring under the assumption that the rent deferral agreement they have entered into with their landlords is equivalent to a “rent payment holiday” or “free rent period” which means that no rent will be paid for that particular period of time either now or in future.
Some large companies like Burger King and Wahaca have launched a campaign for a nine-month rent freeze. However whilst BEIS is sympathetic to the concerns of commercial tenants it has pointed to the measures introduced by the Government to help tenants and has declined to back the call for a nine-month rent holiday, instead suggesting that landlords should try to enter into arrangements with tenants for payment of rent and rent arrears.
Whether you are a landlord or tenant letting or renting commercial property can involve a variety of legal problems at the present time. In this article we have addressed some questions that we are repeatedly asked by landlords and tenants of commercial properties. Proactivity is important. Please contact our enquiry helpline if you have any further questions or require clarification on any issue below.
1.My tenant has refused to pay the rent on the ground that his business is closed due to coronavirus and he has no funds available.
Most leases will contain wording preventing tenants from withholding, offsetting or deducting sums reserved as rents in a lease. Many landlords and tenants have already reached voluntary arrangements about commercial rental payments. The Government is aware of the fact that businesses struggling with cash flow due to coronavirus are concerned about eviction. For this reason, the Government has passed legislation providing that no business can be evicted from premises it occupies until at least 30 June 2020, even if they miss their rental payments. If your tenant fails to pay the rent due under its lease, you should first talk with him to see whether you can reach an agreement that does not involve legal proceedings or any legal enforcement. As he has said that he has no funds available you should enquire whether he has applied for any of the grants and or loans available from the Government and should encourage him to do so if he has not yet applied . If he has applied you can ask him to pay the rent from any money that he receives from the Government. He will also probably be entitled to furlough his employees with the Government paying 80% of his employees’ salaries if his business is temporarily closed so the funds that he receives from the Government can be used to satisfy other outgoings including his rent. If he still refuses to pay his rent you have the following options:
Forfeiture The Government has recently passed legislation preventing commercial landlords from forfeiting(i.e. repossessing) leases of commercial premises where a tenant fails to pay rent due on the property before 30 June 2020. For more guidance click here.
However, please note that this does not mean that tenants can deliberately refuse to pay their rent and will no longer be liable for the outstanding debt. Save for forfeiture, landlords can still exercise their usual remedies and their forfeiture rights will arise again in June 2020, unless the Government extends the moratorium period. If you are a tenant who has withheld payment of your monthly or quarter’s rent without the consent of your landlord, we would recommend that you try to reach an agreement with your landlord as soon as possible and before the expiry of the moratorium period in June 2020.
If you are a landlord contemplating your next steps or a tenant faced with a landlord threatening to sue you please contact our dispute resolution lawyers at Pure Business Law for some advice on next steps.
Letter before Action A letter before action threatening to issue proceedings (and claim legal costs) is an option for landlords and may be enough to get your tenant to pay. We have done this for several landlords in the past with positive results.
Rent deposit Obtaining a rent deposit from an ingoing tenant is standard in commercial leases. Please check your lease and the rent deposit deed. If you require funds urgently from the tenant then taking the money from the rent deposit (if there is a clause allowing you to do so) and asking the tenant to top up the rent deposit account may be an option.
Guarantor Check your lease. If you have an Authorised Guarantee agreement (AGA) clause in your lease a threat to sue the tenant’s guarantor or serve a statutory demand on his guarantor may prompt the tenant or his guarantor to pay the rent.
Commercial Rent Arrears Recovery (CRAR)
This remedy allows the landlord to send a bailiff to the tenant’s property to seize goods from the tenant’s premises. The goods will be sold, and the proceeds used to pay the unpaid rent. This remedy is probably not feasible at this time as a notice needs to be served on the tenant before the landlord can use this remedy. Further, in view of the Government’s “lockdown” measures requiring most people to stay at home except in very limited cases, there may be practical issues in bailiffs attending or entering premises and in arranging for the goods to be sold.
Statutory Demand An option may be the service of a statutory demand on the tenant. The demand gives the tenant 21 days to pay the unpaid rent. If the tenant does not pay the rent, the landlord can take proceedings to make the company or individual insolvent by issuing a winding up or bankruptcy petition on the company or individual.
If you decide to use any of these remedies please ensure that you check your lease carefully and that you follow the correct procedures. Landlords and tenants concerned about this should speak to lawyers about their rights and obligations, the steps which can be taken to recover unpaid rent, and any practical measures they can take individually or jointly to enable the tenant to continue trading.
2.Can I ask my landlord for a “rent deferral holiday” or ask him to reduce the rent payable?
Yes, you can. However, you need to ensure that the arrangement is in writing in case there are problems later on. We are aware of tenants who have been given a 3 month holiday by their landlords. Please be aware that even if your landlord were to agree to reduce the rent payable this would probably only be temporarily, and you would have to pay the shortfall after the temporary arrangement comes to an end. A letter referring to the lease and the arrangement (i.e. a Side letter) should suffice.
Our commercial property solicitors can assist you with the preparation of a Side letter.
3.Due to the pandemic I do not wish to trade anymore. My lease contains a “Frustration” clause. I understand that I may be able to rely on this clause and hand the property back to my landlord without paying any more rent. Can I do that?
Ending a lease, or refusing to enter into a new one, on the basis of an intervening event, can arise only in exceptional circumstances. As regards the pandemic you should refer to the express terms of your lease to find out whether you can terminate your lease because of the pandemic. It is highly unlikely that the pandemic is covered under your force majeure clause.
You are unlikely to get away with handling the keys back to your landlord. A “Frustration “ clause is a standard clause in a lease. The Frustration doctrine provides that a party to a contract is discharged from fulfilling its obligations under a contract if a change in circumstances makes it commercially or physically impossible to perform the contract or if the change in circumstances would make performance of the contract fundamentally or radically different from what was in the parties’ contemplation at the time they entered into the contract.
The doctrine of frustration is rarely successful in court as it is difficult to prove. This is because the courts usually require the party seeking to rely on ”frustration of the contract” to prove that it is “impossible to perform”. You would therefore have to show that there has been some form of frustration of common purpose that makes performance of the lease impossible. You are highly unlikely to be able to rely on the frustration doctrine. You should seek advice from your legal adviser on whether you can rely on the force majeure clause.
4. I am a tenant of a commercial property in Northampton. I have a “Keep open” clause in my lease but have closed down my premises for the past 4 weeks because of Covid-19. Can my landlord force me to reopen the premises?
Many leases stipulate that a tenant must remain open during hours of business . The closure of your business premises for four weeks for no justification will ordinarily constitute a breach of the “keep open” clause in your commercial lease.
The normal procedure if a tenant is unable to conduct business and must close (eg holiday, to carry out works, government directive stipulating closure) is for the tenant to notify the landlord in writing of the reason(s) for closure of the business, the period of time for which the business will be closed and the date of reopening of the business.
We would suggest that you notify your landlord in writing of the closure and inform him that the closure is due to the Government lockdown directive and social distancing requirements. In view of the pandemic it is unlikely that your landlord will insist that you remain open. Most importantly it is highly unlikely that a Court will entertain such a claim under these circumstances and order you to pay your landlord damages where you are complying with the Government’s guidance. If you are still paying the rent your landlord would not be able to argue that he has suffered loss by virtue of the premises being closed. In addition, under ordinary circumstances it is also unlikely that a court will order you to keep the premises open where you have a reasonable reason for closing the premises.
Please contact us if you require advice on the impact of “keep open” clauses and the closure of commercial premises. We welcome enquiries from landlords and tenants.
5. I am in the process of taking out a lease for a dry cleaning shop. What are the risks for me proceeding with the transaction in the current circumstances? With appropriate legal advice, businesses and individuals are still continuing to, enter into property transactions. However, we have had some clients who for various reasons have decided to suspend negotiations on the lease pending the end of the lockdown. Some of the reasons are to do with the availability of finance, difficulties in obtaining quotes from builders for works due prior to entry, shortage of construction personnel willing to carry out works during the lockdown and a reluctance to enter into binding agreements when there is an expectation that prices will go down in the near future.
We recommend that prior to entering into your lease agreement you seek advice on any pandemic issues that may have implications on your transaction eg:
Landlord and tenant works
Health issues – likely exposure of tenants, staff and premises to COVID-19.
We can advise you on the issues that you need to consider and the contractual clauses you can include in your agreement to give you the protection that you need to proceed with property transactions.
6. As a landlord what provisions should I consider inserting into new leases to deal with the impact of the pandemic?
There are several clauses that you can incorporate into your new lease. The pandemic has highlighted some gaps in leases which we would recommend should be filled.
One important area is where landlord or tenant works are to be performed under a new lease and the works may be delayed for reasons relating to the pandemic.
We can help you draft bespoke provisions which can be built into a new lease for the protection of either yourself or the tenant.
We are taking calls daily from clients in these uncertain times.
Specialist Commercial Property Solicitors
If you are a Landlord or Tenant and require advice on the current Coronavirus situation and how this will impact you, please contact us. We are specialist Commercial Property Law Solicitors based in Bedford and operate nationally.
Our highly experienced commercial property lawyers can advise you on your current rights as a Commercial Landlord or tenant.
If you would like to talk through any of the issues that we raised and the consequences for your business or if you have any other queries please call our commercial property solicitors on 01234 938089 for a free 30 minute discussion or email us at email@example.com and a member of our team will get in touch.
Please note that this guide has been prepared for directors and owners of businesses for information purposes only, in particular to provide a summary of key government guidance and initiatives provided to support small businesses in light of the COVID-19 pandemic. The guide does not constitute legal advice and should not be relied upon, particularly as government guidance and initiatives are updated and amended on a daily basis.
For specific queries and for advice on your particular circumstances , please contact our commercial solicitors for advice.