Commercial Leases and Covid-19: Risks and Opportunities for Landlords and Tenants

Update March 2021. 

The moratorium on evictions for non-payment of rent granted by the Coronvirus Act 2020 has been extended to 31 June 2021 for England and Wales and landlords and tenants do need to continue to monitor their position as the uncertainty of the situation continues.

Many of our landlord and tenant clients opened this dialogue last year and agreed rent concessions – be that suspensions or deferrals up to and beyond 31 March 2021, but these should now be revisited and the arrangements formally extended if necessary. In the absence of any agreement, rent remains payable. 

Our conversations with landlord clients suggest that most want to assist viable businesses with an eye to receiving a reliable rental income in the future. However, there are also those looking at this as a strategic opportunity to bring leases to an end early, especially where another tenant is ready to take the premises or where taking back the property provides an opportunity for development or sale of a building.

Tenants need to also consider their position carefully. A good tenant with a viable business may be able to take advantage of the situation and renegotiate the rent or other terms of their lease, whilst a struggling tenant needs to consider whether it is in their long-term interest to give back a property. A tenant with multiple sites may want to rationalise its portfolio, concentrating on those which are likely to be the most profitable.

Whether the intention is to bring the lease to an end, re-negotiate the terms or agree a rent concession our advice to clients remains that they should first fully understand the terms of their leases and seek legal advice at the earliest opportunity.

Ending the lease

It is open to either party to seek to bring the lease to an end. How this can be done depends on the position of each party, and importantly, on the terms of the lease. From a tenant's perspective, bringing the lease to an end early will save rent and other outgoings; from a landlord's perspective removing a tenant who is unlikely to be able to pay the rent or have a viable business can have strategic advantages.

1.   Break provisions

Many leases have contractual break provisions giving one or both parties the contractual right to bring the lease to an end before the expiration of the contractual term. Break clauses can be rolling (exercisable at any time) or fixed (you only have one opportunity to exercise the break). Both rolling and fixed break provisions usually carry conditions that must be complied with in order for the break to be validly exercised. Compliance with the break conditions has been interpreted very strictly by the Courts.

2.   Forfeiture

Subject to the current provisions of the Coronavirus Act 2020, forfeiture is a remedy available to landlords who wish to bring the lease to an end following the default by the tenant of one or more of the terms of the lease. However, care must be taken by landlords to ensure that the correct procedure is followed when exercising this remedy. Save in limited cases, a landlord cannot simply change the locks.

Landlords should also consider whether they have a remedy against someone other than the tenant: such as a personal guarantor, an authorised guarantor, or previous tenant under the lease.

3.   Surrender

The absence of a contractual right to break the lease does not prevent the parties from agreeing to bring the lease to an end early i.e the tenant surrendering the lease. This does need to be agreed carefully to ensure that the parties are not inadvertently being released from existing breaches of the lease. There may be a premium paid by the tenant to the landlord for agreeing to this or in some cases the landlord may pay the tenant a reverse premium if it considers it to be particularly advantageous to bring the lease to an end early. The question of dilapidations must also be addressed at this stage.

Struggling tenants often consider they have no option but to abandon their premises, stop paying the rent and give back the keys. This is particularly true where there is no contact from the landlord and no attempt to agree a rent or other concession has been made. In this case it is vital that landlords do not inadvertently accept the surrender of the lease by treating the property as theirs. This sort of deemed surrender can have many unintended consequences for both parties, particularly with respect to breaches of the lease that arose prior to the surrender.

Re-Negotiation of the Lease

Parties can review and renegotiate the terms of the lease at any time during the contractual term of the lease. These frequently include making the term longer or shorter or changing the frequency or method of rent reviews.

However, care needs to be taken to ensure that the terms of the lease that are changed are not so fundamental as to constitute a surrender of the current lease and the grant of a new one. The consequences of this deemed surrender and regrant include registration of the lease at the Land Registry and/or having to make a Stamp Duty Land Tax return, and in some cases a further payment of SDLT and the tenant inadvertently acquiring security of tenure.

It is vital that permanent changes, as opposed to concessions (see below) to the lease are properly documented and registered. Failure to do so can result in the changes being invalid.

Rent Concessions and Side letters

It is important that any temporary changes to rental payments such as deferment of rent and/or changes to the timings of rental payment are properly documented in a Side Letter.   The Side Letter should record the new terms and the duration of the concession and ensure it complies with Section 2 Law of Property (Miscellaneous Provisions) Act 1994.  In addition it should state that the concession will immediately end if there is breach of any other tenant obligation in the lease, the other terms of the lease remain unchanged and that the concession should be disregarded for rent review purposes.   If there is guarantor they should be included in the Side Letter, if not their guarantee could fall away.

Insolvency

On 27^th March 2020 the business secretary announced the Government's intention to introduce a moratorium to the service of Statutory Demands and presentation of Winding Up Petitions.  This was included in the Insolvency and Corporate Governance Bill published on 20^th May.  The Bill is due to be debated in the House of Commons on 3^rd June and then passed up to the House of Lords where it is  likely to be subject to amendment.  This timetable is crucial as the moratorium will last until 30^th September 2020 or one month after the Bill has been enacted.  This moratorium will have important consequences for both landlords and tenants where debts have arisen as a consequence of Covid-19.  Although the moratorium will not apply where the debt that has arisen is not related to the Pandemic.

This Bill also introduces other long-term reforms to the insolvency procedures which will aid the survival of viable businesses.  Creditors' rights are also affected which will be to the advantage of some and disadvantage of others.

Insurance

Most insurance policies do not cover the situation we have experienced with the lockdown and impact of Covid-19.  By making Covid-19 a "notifiable disease" some insurance policies may have been triggered but most property insurance policies and Business Interruption Policies do not cover losses caused by such a disease, a pandemic or the requirement of the Government to close.  There are some cases where a policy may indicate that this cover is in place, and the Association of British Insurers are encouraging underwriters to make payment under the policy.  It is important to carefully check the terms of your insurance policy and seek advice where required.

Lloyds of London has formed a committee to look into the possibility of a Government backed scheme to cater for future pandemic claims.  This has been labelled informally "Pandemic Re".  It is possible that it could follow the format of Pool Re which was formed in 1993. 

Social Distancing

The strictures for Social Distancing are a legal requirement that is constantly under review by the Government.  With the retail sector starting to open, landlords and tenants in that sector should keep the press releases issued by the Government under review. Those Government announcements are legal requirements and will override any conflicting lease terms  The tenant's duties of compliance arise at the threshold of the demise. A tenant with a lease of part of a multi-let building, or in a shopping center for example, will need to liaise closely with its landlord to ensure compliance with Government regulations in common areas, such as reception areas and lifts to minimise the health and safety risks to all staff and visitors.

Contact

For further information or to discuss how we can assist you please contact​

• Nishita Gudka: Nishita.Gudka@lbmw.com
• Guy Stephenson: Guy.Stephenson@lbmw.com
• Denise Carritt: Denise.Carritt@lbmw.com