COMMUNICATION IS KEY:
“assumptions are the termites of relationships” (Henry Winkler)
“the single biggest problem in communication is the illusion that it has taken place” (George Bernard Shaw)
COMMERCIAL PROPERTY – LANDLORD AND TENANT RELATIONSHIPS
“Get out of Jail Free” Card?
- Most leases allow little leeway in terms of opportunities to avoid payment of rent or compliance with other obligations.
- Extreme measures?
- Does your lease contain a break option which can be exercised? If yes and you’re sure you want to exercise it (you cannot revoke it), ensure this is done in good time and strictly in accordance with the terms of your lease to be effective.
- UK leases tend not to contain force majeure provisions allowing termination for acts of God etc. In general, “force majeure” will only apply if there is a specific clause in a contract.
- “Frustration” is a potential (perhaps tenuous) route to argue that the lease must be at an end, but this would be breaking new legal ground and there is a legal debate whether it might apply. There are no reported cases. If you are a tenant, could you use this as an argument to persuade the landlord to assist, even if the period of the expected lockdown might well be too short in any event for this to be successful?
- If you are a tenant and currently negotiating a lease, try for an extended rent-free period, a rent-free period being granted/extended where the rent only kicks in after the date when ‘social distancing’ is no longer obligatory/ where fit-out works are permitted, require a rolling tenant break option exercisable in the event of a ‘coronavirus event’ or ‘lockdown’ occurring
The Position of Tenants and Landlords
In general, there is no right for a tenant to refuse to pay rent or perform its other obligations if the building cannot be occupied.
There is increasing feedback that many landlords are willing to agree some support in terms of payment of the March quarter’s rent. They are alive to the pressures on business occupiers and want to retain them wherever possible.
What we are seeing so far includes a number of solutions, such as:
- a complete waiver of the rent for the next one or two quarters;
- reduction in the rent for the next one or two quarters (30% to 50% reductions seem most common);
- deferral of rent for one or two quarters, with the unpaid rent being paid over 12 or 24 months;
- use of a rent deposit to cover the current quarter (subject to top up of the deposit in the future);
- rent suspension (base rent/ turnover rent ‘closure days’) where a building or centre is closed and cannot open for trade where circumstances arise beyond the landlord/tenant’s control.
In general, tenants need to approach their landlords requesting support.
We recommend that you write, email or speak to your landlord or the managing agents, as appropriate, to commence a dialogue.
We are now seeing many agreements with landlords which are generally documented in a short side letter. This can be done quickly once agreement has been reached.
Insurance: We recommend that you check your insurance policies for your premises and the position regarding business interruption and what is actually covered. We suggest you try to extend your cover if appropriate in the circumstances and having taken advice from a suitably qualified professional in the industry.
Landlords have various remedies to recover unpaid rent and interest, but the Government has announced some protection for tenants.
There are some practical difficulties and delays for landlords seeking to take action to recover arrears.
- The UK Government has now brought in legislation to the effect that a landlord is not currently allowed to forfeit a tenant’s lease for non-payment. (The Forfeiture remedy is the usual ‘main teeth’ that landlords have in these circumstances).
- The landlord can serve a statutory demand, i.e. the first stage to wind up the tenant company, but the court at present is not hearing winding up petitions so there would be some leeway before the landlord could take steps using this procedure, and it would be an aggressive stance to take, and not one which would be conducive to good relations.
- The landlord could use the Commercial Rent Arrears Recovery procedures (known as CRAR), but this does involve service of various warning notices and bailiffs attending the premises to remove goods, which are sold to cover the arrears. The procedure there takes time. We anticipate in practice that some, but not all, bailiffs will be fairly reluctant to enter buildings which might be deemed unsafe in the present circumstances.
- The landlord could issue proceedings against the tenant for the rent – there are no blanket freezes on this as the moment, but the logistics may be on your side, i.e. many of the courts are closed, court staff not working/only dealing with urgent matters, so in practice it is conceivable that it would be very many months before the landlord could enforce a court judgment.
Other Support for Tenants
There are also other areas of support which are offered to UK businesses and you should obtain from your own accountants.
In terms of business rates, there are reliefs for leisure and hospitality and retail premises but, at this point, not for office premises. There is however some suggestion that if commercial premises are vacant for 6 weeks there may be an argument to seek empty rates’ relief, although councils may well resist on the basis that the properties are still “occupied”. Here is a link to an article by Aitchison Rafferty which may be of interest.
Here is a link to articles referring to reliefs available and advice for businesses from WMT accountants. WMT comment that the next quarter of VAT payments will be deferred, meaning businesses will not need to make VAT payments until the end of June 2020. Businesses will then have until the end of the 2020-21 tax year to settle any liabilities that have accumulated during the deferral period. The deferral applies automatically, so businesses do not need to apply for it. VAT refunds and reclaims will be paid by the government as normal.