COVID-19 advice for corporate occupiers
07 January 2021
Commercial tenants – whether occupying offices, retail premises, industrial units or other property - face potentially existential questions arising out of their landlord and tenant relations, how to manage cashflow and outgoings as revenues dry up, premises shut down and uncertainty reigns.
With the Government having now introduced emergency legislation through the Coronavirus Bill and the Corporate Insolvency and Governance Bill to put in place a moratorium (which the Government has recently announced is to be extended from 31 December 2020 until 31 March 2021) on forfeiture of commercial leases and a separate ban on commercial landlords issuing statutory demands and winding-up petitions against tenant companies unable to pay amounts owed due to coronavirus, this is likely to dramatically change the landlord and tenant landscape for the short term at least.
Lease termination – can I just hand my keys back?
We have heard stories of tenants shutting premises and unilaterally handing back keys. It is highly unlikely that this is effective:
- a surrender cannot be unilateral, and is only effective if the landlord agrees. If a tenant shuts up shop and hands the keys back without the landlord agreeing to a surrender, the lease will continue with full liability. It is, of course, highly unlikely that a landlord would agree a surrender in the current circumstances and they may be prohibited from doing so by their own contractual arrangements (e.g. superior leases, mortgages or funding arrangements).
- equally, commercial leases in England do not typically contain ‘force majeure’ termination provisions – whether automatic or at the tenant’s election;even in other contracts, it is a moot point to what extent Covid-19 would fall within ‘force majeure’ wording. So, it is unlikely that the lease would permit a tenant to terminate unilaterally in reliance on the Covid-19 situation or, say, the closure of the premises. There may, of course, be a generic break clause allowing a tenant to terminate the lease on notice and tenants could consider whether to exercise such clauses. That said, this option typically requires a notice (of say six to 12 months) and would be of little immediate assistance in the current situation.
- it might be thought that the current situation – with compulsory closure of many premises - is so dramatic as to amount to an inherent undermining – or ‘frustration’ - of the contract. Whilst theoretically possible under English law, it is very rare in practice, and the most recent attempt to argue frustration of a lease -the ‘European Medical Agency case’, where the tenant relied on the effect of Brexit - failed. The consensus is that the same would apply here, particularly where the lease still has a number of years left to run. The position may be different where a tenant’s premises have been forced to shut under Government legislation and the lease has less than 12 months left to run.
Rent suspension – can I stop paying rent and what steps can the landlord take if I do?
This is clearly something which many tenants are looking at and, in some cases, it may be a simple commercial necessity if the tenant cannot generate any revenue with its premises closed.
Whilst most commercial leases will have a rent suspension provision, which is triggered when the premises are incapable of beneficial use/occupation, these clauses are typically linked to physical damage or destruction to the property (e.g. where a fire destroys the property), being in turn tied to the landlord’s building insurance cover for rent in such circumstances. So, whilst this is something to check (along with insurance policies generally), such clauses are unlikely to apply to the present situation.
If so, a failure to pay rent, or other sums due, would be a breach of the lease. However, in light of the Government’s agreement to put in place a moratorium on lease forfeiture (currently up to the end of March 2021), the landlord will be unable to evict a tenant for non-payment of rent (or other sums falling due). This approach encourages businesses that are able to make their rent payment to do so, whilst providing three months’ grace to those that are struggling.
The Government has now extended the statutory moratorium, to include a ban on commercial landlords from issuing statutory demands and winding-up petitions against tenant companies unable to pay rent and other sums under the lease due to the impact of coronavirus. Whilst a landlord can still present a winding up petition against a tenant company, under the new measures, the petition must first be reviewed by the court to determine why the company is unable to pay its debts. If the court is satisfied that the inability of the tenant to pay the rent relates to coronavirus, the petition will be dismissed. The ban also extends to landlords exercising Commercial Rent Arrears Recovery (CRAR) unless they are owed 276 days of unpaid rent (pr 366 days for notices served after 25 December 2020).
It should be noted, however, that while landlords are urged to give their tenants the breathing space needed, the Government has called on tenants to pay rent where they can afford it. Indeed, if a tenant fails to pay rent, the landlord will still have its other remedies available to enforce the debt against the tenant, including issuing a court claim, drawing down on a rent deposit and enforcing against a guarantor (including former tenants under an authorised guarantee agreement).
Of course, whether a landlord would take any of these steps in the current situation is a different matter. We turn to that below.
What else can a tenant do?
The options that most tenants are considering are:
- Open a dialogue with your landlord: The Government has recently published a voluntary code of practice to encourage commercial tenants and landlords to work together to protect viable businesses. Whilst the code is voluntary only, landlords will be acutely aware of the unprecedented trading difficulties being faced by their tenants and will appreciate/be advised that there may be little to be gained by rushing to take enforcement action. As was the case in the 2008-9 credit crunch and global recession, landlords may be better off having a tenant in situ on a rent concession, rather than being left with a claim against an insolvent tenant, a vacant property (which cannot be re-let) and a rates liability. This will likely be the approach adopted by many landlords in the current situation. We have heard that some of the larger institutional landlords are taking a pragmatic, long term approach, whereby they look to work together with their tenants to get over the immediate crisis. There are a range of rent concessions which can be discussed – from moving to monthly payments, to a rent reduction/suspension/waiver or agreeing a turnover rent. Approaching a landlord may feel counter-intuitive and the desirability of doing so will depend on the tenant’s situation, the nature of the landlord and the relationship.
As stated above, it may well also depend on the landlord’s own contractual situation (e.g. the landlord’s obligations under any superior lease and any mortgage or funding arrangements). This is important as the Covid-19 situation has had a major impact on the capital markets (including CMBS markets) and landlords may themselves be justifiably concerned about their own default under those arrangements and/or may be constrained in what they can agree. Equally, it may also depend on the tenant’s own situation (including regulatory aspects and its own financial covenants). Even so, whilst there can be no guarantee as to the outcome of such a dialogue, it may be the only practical option which a tenant has.
- Insurance: Tenants should check their insurance policies for general liability, business interruption, crisis management and/or mitigation cover to see if this might apply to the present situation. Alternatively, contact your insurance broker and discuss the position with them.It is worth noting however, that the Association of British Insurers have already issued a statement saying that it is unlikely that many businesses will have any claim under their business interruption insurance policies in respect of a closure brought about by Covid-19.The statement suggests that there are policies out there, but the vast majority of businesses will not have bought such extensive cover.
- General contingency planning: Most businesses are now actively looking at general contingency planning and this will include analysing all business overheads (with an immediate focus on topping any non-essential/discretionary expenditure), debt/cash collection and opening discussions with stakeholders/employees/ banks/suppliers as well as seeking advice from accountants and lawyers. It is also important to keep an eye out for measures, assistance and reliefs being introduced by the Government – which are in a constant state of flux. There are now very extensive general measures in place for businesses, including the Covid Commercial Financing Facility, the Coronavirus Business Interruption Scheme, the £25,000 grant for smaller retail/hospitality/leisure businesses, rates relief for all retail/hospitality/leisure businesses and the support for small businesses scheme.
A note of caution…
Tenants should be cautious about how they proceed and should think twice before unilaterally imposing terms on a landlord without its agreement. Tenants should be aware that the moratorium imposed by the Government does not create a rental holiday; landlords are still owed the rent and, absent an agreement with the landlord, once the moratorium has lapsed the landlord will be able to claim for forfeiture and/or serve a statutory demand in respect of any sums which have not been paid.
If you are a tenant contemplating your next steps or a landlord faced with tenants asking about their options, feel free to contact our team at Lewis Silkin for some advice on next steps.
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