Following the Government’s announcement on Monday 23rd March 2020 that all but essential businesses should remain closed until further notice in a national effort to halt the spread of the coronavirus, many tenants have been forced into uncertainty. Landlords will also be facing a fall in demand for new tenants and requests for rent reductions or freezes from their existing tenants.
In this article, we highlight the statutory protection given to commercial tenants which has been introduced by the UK Government and provide answers to questions we have received from both landlords and tenants regarding rental obligations during these unprecedented times.
1 - Can a commercial tenant withhold rent?
Most leases do not allow the commercial tenant to withhold rent unless the premises has suffered significant damage pursuant to an insured risk. It is unlikely that the effects of Covid-19 would be covered by rent suspension provisions in a lease meaning that tenants will not be able to withhold rent payments without their landlord having the right to re-enter the premises without notice and take possession (known as forfeiture) which would effectively end the lease. The UK Government has however brought in new legislation to alleviate some of the pressure of rent payments for businesses.
2 - What is the new statutory protection for a commercial tenant?
As the restrictions imposed on businesses look set to continue beyond a few weeks, the UK Government introduced the Coronavirus Act 2020 which became law on 25 March 2020. This legislation has suspended a landlord’s ability to take forfeiture action for commercial tenants who cannot pay their rent.
These measures, which take effect from 26 March 2020 mean no commercial tenant can be forced from their business premises if they do not pay their rent in the next three months. This period ends on 30 June 2020, but is capable of being extended by the government if the restrictions continue.
It should be noted that this legislation provides that no conduct by or on behalf of the landlord during these three months will be regarded as waiving the right to forfeit for non-payment of rent.
3 - Is the unpaid rent during this period deferred to a later date or is it waived?
The UK Government has made clear that this is not a rental holiday for commercial tenants, they will still be liable for the entire sum of rent at some stage regardless of their circumstances. The new legislation is intended to just protect tenants from eviction during the period of 26 March 2020 until 30 June 2020 if they are unable to meet their rent payments.
4 - Do Landlords have to agree to requests from their tenants for a rent holiday or rent reduction?
It is entirely within the landlord’s discretion whether they agree to a rent reduction or rent holiday with their tenant which may call for difficult decisions to be made.
Landlords will need to carefully weigh up the adverse effect of agreeing to a reduced rental income and the benefit of keeping their tenants afloat and maintaining a good relationship once this pandemic passes.
5 - Do temporary arrangements between landlords and commercial tenants need to be documented?
If the landlords decide that they are willing to put temporary arrangements in place with their tenant then it is vital that these are carefully documented by a solicitor in the form of a side letter. Alternatively, if the landlord and tenant agree that there is to be a permanent change to the rental obligations under the lease then a deed of variation would be more appropriate.
Some of the main terms which should be agreed between the landlord and tenant and documented appropriately are as follows:
- the length of time that the new rental arrangement will last;
- the amount of reduction in the rent;
- whether there is any interest payable on any deferred rent;
- if the rent is deferred, when this will be paid along with any interest if applicable;
- provisions requiring any government assistance that is given to the tenant to be declared to the landlord along with a reimbursement to be made where this is relevant;
- confirmation from the landlord that they will not pursue the tenant for any breach of the tenant’s lease as a result of the new documented arrangement.
From the landlord’s point of view the new terms of the deferment or reduction need to be made clear to avoid the risk that the temporary arrangements amount to a waiver of the right to be paid the full rent.
The Government’s press release notes that they are “actively monitoring the impact on commercial landlords’ cash flow and continues to be in dialogue with them”. The situation is clearly rapidly evolving, particularly as the ‘suspension period’ can be extended beyond 30 June 2020, so it is important for both landlords and tenants to keep monitoring the advice published by the government.
We at Berry Smith can assist you in navigating through these challenging times whether you are a landlord or a commercial tenant. For more information on any of the points raised or if you would like tailored advice to your needs, please contact Kelly Cassemis or Martin Pursall in our commercial property team.
Kelly Cassemis (Associate) firstname.lastname@example.org
Martin Pursall (Partner) email@example.com