The unprecedented restrictions imposed to control the spread of COVID-19 have disrupted the businesses carried on by many commercial tenants who are now trying to reduce their overheads, including property outgoings. At SAS Daniels, we have been approached by commercial landlords who are concerned about their rental income. Here are some of the most frequently asked questions.
Can Commercial Tenants Get Out of Their Leases?
The options for getting out of a lease are limited. A lease can be terminated if it is frustrated but we do not think that the COVID-19 outbreak will result in the frustration of a lease.
Commercial Leases are unlikely to contain a “force majeure” clause (dealing with events outside of the control of the parties) that is in favour of the tenant. Even if your lease does contain such a clause, it is unlikely to allow the lease to be terminated. You should consult a solicitor if your tenant tries to rely on this type of clause.
The surrender of a lease requires a willing landlord and an assignment or subletting would require a willing tenant to take over the property. An assignment or subletting also usually requires the consent of the landlord (not to be unreasonably withheld or delayed). We think these options are too slow to assist most tenants in this crisis.
If a tenant is lucky it will have a break clause in its lease with either the right to break at any time or with an imminent break date. However, such clauses usually require six or at least three months notice. Break clauses often contain onerous conditions that have to be strictly complied with. If your tenant serves a break notice you should check that the tenant has served the notice properly and complied with all of the conditions specified in the lease. Your solicitor will be able to help you with these points.
Can Commercial Tenants Stop Paying The Rent Because of the Lockdown?
Well-drafted leases normally exclude the tenant’s right to make any deductions or to set off any sums against the rent.
Leases commonly include rent suspension provisions but these usually only apply where there has been physical damage to the property and it cannot be occupied. They are unlikely to assist where the Government has ordered the closure of the property.
If a lease contains a force majeure clause it may provide for the payment of rent to be suspended. Legal advice should be obtained if your tenant seeks to rely on this type of clause to stop its rent payments.
Non-payment of rent usually gives the landlord the right to terminate the lease after a specified period of time. However the Government has introduced emergency legislation to suspend these termination rights until 30 June 2020 and it may extend that date in the future.
Even if the lease cannot be terminated the Landlord can still claim interest or possibly sue for the rent arrears or serve a “statutory demand” and then apply to liquidate the tenant or to make them bankrupt. Landlords should consider whether such action makes commercial sense. Does the tenant have any cash to pay the rent? If the action forces the tenant to cease trading will the landlord be able to re-let the property and could this action damage the reputation of the landlord?
For most tenants the only option will be to negotiate a rent concession with their landlord e.g. a rent-free period, a rent discount or deferring the payment of rent or moving to monthly payment terms. Such concessions will require the landlord’s agreement and may not be unilaterally imposed on the landlord.
Any concession should be properly recorded in a side letter, which should be prepared by the landlord’s solicitor at the cost of the tenant. Otherwise there is a risk that the landlord will lose the right to enforce the terms of the lease in the future. The tenant will argue there has been a waiver or estoppel and the Landlord will have to give “reasonable notice” before reverting to the original terms of the lease.
The side letter should reserve the right to re-impose the original lease terms when the crisis is over. The Landlord should be able to terminate the concession by giving notice to the tenant. The Landlord should also be able to terminate the concession immediately if the tenant breaches the terms of the lease. The concession should be personal to the tenant.
If would like further information on the effects of COVID-19 on commercial landlords, or have any commercial property-related enquiries, please contact Steven Percy, Partner on 01625 442158 or email [email protected]