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Coronavirus and Commercial Leases

View profile for Nancy Wilson
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Struggling tenants are never good news for a landlord and, in the difficult circumstances we find ourselves in, landlords and tenants should seek to have open discussions with each other about their commercial lease and what tenants can afford to pay.

A number of our clients who are tenants are currently in discussions with their landlords about short term rent reductions, deferrals or rent holidays, and we thought it might be useful to share some of our thoughts with you.

Landlord Forfeiture Right

One of the measures recently announced by the government is a freeze on forfeiture of commercial leases for non-payment of rent due for the period from 26 March to 30 June. This period may be extended by the government if needed.

Essentially this means that landlords will be prevented from forfeiting a lease and re-taking their premises from tenants that are unable to pay their rent.

The Act only offers a temporary suspension of the landlord’s right to forfeit – rent is still payable, and interest will typically still accrue under the lease on late payments. It does not prohibit landlords from taking other action to recover unpaid rents or forfeiting for non-payment of other charges due under the lease, such as taking steps towards having an individual declared bankrupt or a corporate tenant wound up in insolvency proceedings or use the commercial rent arrears recovery (CRAR) procedure, which allows the landlord to take control of the tenant's goods in order to recover an equivalent value of the unpaid rent.

Rent

If you are struggling with rent payments, you could request a change to either the rent amount or the way rent is paid. There is nothing in English law that would require the landlord to act in good faith and entertain that request although there may be commercial pressures to renegotiate lease terms, if only for a short period.

Please find below a list of options to consider. These involve you and your landlord agreeing a way forward that is different from what has been agreed in the lease:

  • discounted rent
  • deferred rent - the obligation to pay rent does not go away but a payment plan might be agreed between the parties
  • a rent-free period
  • service charge reduction.

Manner of payment

Instead of offering direct financial discounts, you could agree with your landlord on a change in the way sums are paid. This might include the landlord:

  • accepting rent on a monthly (rather than quarterly) basis
  • accepting rental payments in arrears, rather than in advance
  • drawing on an existing rent deposit instead of collecting rent.

The parties’ temptation might be to reach an informal agreement, however, our advice is that any agreement to vary the existing terms should be very carefully considered and documented. How long will the rent be postponed? Will there be a time limit on how long the rent holiday is to be? Is there a way to end the agreement?

Ending a Commercial Lease

There is nothing to stop you from locking up and walking away but this action alone will not result in the lease being ended. Surrendering a lease cannot be done unilaterally so your actions will not end your lease; the landlord will need to accept the action as an event of surrender (e.g. handing over of keys by tenant and acceptance of them by the landlord). Even if this did happen you would remain liable for all liabilities existing as at the date of the surrender.

Your landlord may be willing to agree to surrender your lease. This essentially means that both you and your landlord agree to bring the lease to an end early. Whether or not your landlord is willing to agree this will likely depend on (a) its intentions for the property, and (b) its ability to re-let the property to another tenant in the current market conditions.

Way Forward

The appropriate course of action will depend on various factors, including your relationship with the landlord, the provisions of the lease in question, and the landlord's commercial objectives. We suggest that open, collaborative discussions should be initiated, with the aim of achieving as much certainty as possible for both parties.

Should you have any questions please do not hesitate to contact us. It may be that all you need is a 10-minute chat or a document to ensure that the agreement is legally binding so, should you have any questions, please do not hesitate to contact us.

 

Please note that this information is for guidance only and should not be regarded as a substitute for taking full legal advice on specific facts and circumstances.
 

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