Retail tenants were relieved to hear that the Coronavirus Act 2020 (“CA 2020”) prevented landlords from forfeiting a business tenancy on the basis of unpaid rent between 25 March and 30 June 2020, or possibly later if the government extends the period.
Further restrictions are due to come into play to protect tenants which will prevent landlords from exercising Commercial Rent Arrears Recovery (where the tenant is less than 90 days in arrears) and from initiating an insolvency process where the tenant’s inability to repay its debts has arisen as a result of Covid-19.
But with long-term relationships at stake and with landlords starting to feel the pinch, how should retail tenants go about maintaining working relationships and meaningful dialogue?
Rent Concessions – key points
- Engaging with your landlord at an early stage and trying and reach a compromise which is workable to both parties is advisable.
- It is sensible to formally document a rent concession or temporary variation to the lease in a side letter with the terms clearly set out.
- You may think that simply agreeing to defer rent constitutes a sufficient agreement but it is good business practise to clarify the terms. You will need to consider the following to reduce the risk of an argument (which may result in having to incur legal costs) further down the line:
- How long the concession will last?
- Will interest be charged and if so, when will it be payable from?
- What will happen to service charge payments, insurance and other sums due under the lease? (CA 2020 clarifies the term “Rent” to include any sum which a tenant is liable to pay under a relevant business tenancy)
- What if there is an upcoming rent review?
- What is the implication on guarantors and successors in title?
- What is the implication on break conditions?
- A landlord may use the negotiations as an opportunity to ask for something in return, such as to push back a break date, so make sure you know your fall back positions.
- And finally, ensure that you have updated your landlord with a correspondence address and ask that copies of any letters/notices are also sent to you by email and to your home address.
Terminating your lease – get your break notice right
Remember that break notices are strictly interpreted by the courts and you should assume that they will not make exceptions during this period. The following are important points to get right:
- If you have served a break notice and the termination date falls during the period of disruption, double check (as soon as possible) the break clause conditions.
- If you are concerned about your ability to comply with the conditions, make early contact with your landlord to see if it will agree to waive/vary them.
- If you have agreed a rent concession and the break clause is conditional upon payment of all sums due up to the break date, you will need to check with your landlord the correct amount to pay. You do not want to assume that the concession is sufficient only to be caught out and discover that the full rent should have been paid. This could have disastrous consequences as this will potentially invalidate the break notice and you could be tied into the lease until its expiry (which could be several years down the line).
Is it possible to terminate a lease because you cannot operate?
Many retailers are considering terminating their leases to save short term costs and there may be ways to do so.
- Is there a force majeure clause and will it apply? In short, probably not. Such clauses are rarely found in commercial leases and they are not implied. It is still worth checking your lease to see if there is one and if so what it covers. Courts interpret force majeure clauses strictly and the devil will be in the detail.
- Can I argue that the lease has been frustrated? Whilst case law has supported the possibility, there is no reported case in English law of a lease terminated by frustration. It is very unlikely that you will be able to successfully argue that your lease has been frustrated.
- What about contract law? The lease is your contract with the landlord and there may be a contractual way for you to terminate your tenancy. For example, are you approaching the end of your contractual term? Can you serve a notice under section 27 of the Landlord and Tenant Act 1954? Is there a break right within your lease?
A practical checklist for tenants with closed premises
Whatever the outcome of your negotiations you must bear in mind the practicalities of being a tenant of a closed premise.
- Inspections – we are allowed to travel for work that cannot be done at home. So, if you can, try to factor in occasional inspections of the premises to check that the alarm systems are still operating properly and to collect post.
- Security – consider ramping up the security. The additional cost of boarding up, installing window bars and having a good alarm system will be worth it compared to the cost of dealing with squatters/dealing with a break in.
- Insurance – remember to inform your insurers that your premises are closed and keep them updated. You may be required to take various steps (such as implementing additional security) so make sure that any requirements are followed to avoid jeopardising your insurance cover.
- Post – it is possible that your lease provides for notices to be served at your premises so make arrangements for post to be checked every so often to minimise any risks of missing an important document. Think twice about re-directing post because it could take several weeks before it is received at the alternative address.
And finally, the government’s aim for implicating these measures is for landlords and tenants to make use of the breathing space and to try and reach a sensible agreement. Working together will be in the best interests of both parties and the last thing which anyone needs is a legal dispute.
Chloe Benson is a senior associate in the property litigation team at City law firm Goodman Derrick LLP. www.gdlaw.co.uk