COVID-19: Key practical considerations for landlords and tenants

We have been busy advising clients on a range of commercial landlord and tenant issues prompted by the current pandemic. This insight distils a few thoughts, questions and even some answers in one place.

Practicalities within shared buildings

Where an organisation occupies part of a building, issues may arise where a tenant needs to continue using the building, but the landlord has reduced services, or is no longer providing them at all. 

What the landlord can do without derogating from grant, will depend on the drafting of the lease. For example:

• The tenant may only be able to exercise rights over common parts during ‘permitted hours’. How have these ‘permitted hours’ been defined, and can the landlord change them? 
• What obligations does the landlord have to provide services? Does it only have to use ‘reasonable endeavours’ to provide these? 
• Which of the services would it be reasonable for the landlord to withhold owing to Covid-19 and current government guidance for people only to go to a place of work if it is ‘essential’? 
• What is the impact on a tenant occupying a building where safety equipment (e.g. alarm systems) is not being regularly tested? How will this impact on the tenant’s insurance? 

These issues can be exacerbated when dealing with buildings entered by members of the public - a not uncommon scenario within the public sector. How can an organisation ensure that the public can safely access premises – particularly in current circumstances but especially if the landlord has withdrawn or limited services?

Rental negotiations and the forfeiture moratorium

The Coronavirus Act 2020 contains a moratorium on forfeiture for non-payment of rent until at least 30 June 2020. This means that, whilst the rent remains due, commercial tenants are protected from having their leases forfeited if they are unable to pay. 

Forfeiture for other breaches is also going to be difficult, as all proceedings for possession, as well as enforcement of possession proceedings, have been stayed for 90 days from 26 March 2020. 

Other enforcement options may be open to landlords, including issue of statutory demands and other debt action, but these need to be investigated on a case-by-case basis. Market practice is varied, with some landlords showing more flexibility to their tenants than others. Landlords should also bear in mind any reputational damage that could be caused by taking action against a tenant who is unable to pay rent because of the current crisis.

As mentioned above, the position in law is that the rent and other obligations remain due.  Nothing in the Coronavirus Act 2020 permits rent not to be paid or provides rent holidays (let alone waivers). It is merely enforcement action that directly affects leases that is temporarily prevented. Of course, there is a package of other measures designed to help tenants and their businesses.

What is current market practice where a tenant is struggling to pay its rent?

Many commercial tenants are struggling in the current lockdown. The situation is evolving day by day and it is not possible to identify a standard or even common market practice where this is the case. Some landlords and tenants are even taking different approaches to different properties within their own portfolios.  

Most landlords (not just in the public sector) will be receiving multiple calls daily from their tenants, seeking assistance. Whilst Government has offered unprecedented support for business, nothing specific is available for investors/landlords who might be inclined to offer concessions.  

We are seeing a wide range of different approaches. The most generous landlords are agreeing to waive a quarter’s rent and other payments and writing off arrears. More commonly, a three- month rent holiday or deferral (or perhaps half rent) may be agreed followed by a payment plan. Others are agreeing to monthly payments, rather than quarterly. Where deals are being reached, they are more often than not being documented by informal concession agreements or letters rather than formal lease variations. 

It is not an exact science.  Many landlords are conscious of the need to help tenants if they can afford to because of the even less attractive prospect of full-blown tenant insolvency, leaving the landlord with premises that need re-letting in a potentially bleak post COVID-19 market place in which Government concessions on, for example, business rates have perhaps come to an end. Even if a tenant can be found, incentives might have to be keenly pitched, further depleting income. Many (though not all) landlords will see goodwill amongst their tenants as being a valuable commodity when we exit our current troubles. Of course, the attitude of lenders will be influential as well and will constrain what can be offered or accepted. 

Keep open covenants in the current lockdown

There are more esoteric problems arising for some tenants: those with “keep open” covenants in their leases, for example. There is an inherent conflict between the usual tenant covenant to comply with all legislation and rules (which now require tenants in many sectors to be closed for trading) and a separate covenant to open premises open for trading. It may be that the keep open requirement is trumped by the recent COVID-19 legislation requiring closure, but due to the novel circumstances, the point has not been tested. 

Could leases be subject to termination?

Some tenants may be exploring whether or not it is possible to argue that their lease has been terminated by frustration due to being forced out of their premises since the lockdown began. 

If a contract is frustrated it is brought to an end. However, it is of very limited application and will only apply when something occurs, after the contract has been entered into, which renders it impossible to fulfil, or transforms it into something so radically different that it should be brought to an end. It is notoriously difficult to prove that a contract has been frustrated. The recent attempt by the European Medicines Agency to have its lease declared frustrated by Brexit, failed. 

Some sectors are more obviously impacted than others by the restrictions now in force.  Even tenants required to close by law may struggle to prove frustration, particularly where the likely period of closure is relatively short. The situation might be different where the lease is contracted out, the term date is looming and the lockdown restrictions last for a relatively long period. 

Of course, each situation will require careful assessment. Licences, co-location agreements and similar models may well contain bespoke termination and force majeure clauses not commonly seen in mainstream commercial leases. However, even these may only provide relief from the consequences of a breach (non-payment of rent for example) rather than the termination event that tenants might hope for. Equally, many tenants will want to commence trading as soon as restrictions are lifted and will not be looking to pursue termination options.

Considerations on new property deals 

Of course, some new deals are still happening. We have either completed or received new instructions for sizeable transactions in recent days. In these circumstances, the parties are inevitably thinking about novel issues, including:

• Where agreements for lease are required, what happens if completion cannot take place on the agreed date? Practical issues such as witnessing of signatures on documents can potentially cause delay.
• What if contractors cannot start work (whether in relation to landlord obligations or tenant fit out) when planned or if ongoing building work is brought to a halt?
• Some tenants are now seeking rent suspension clauses to cover periods when they cannot use or access their premises because of this (or any future) pandemic. Landlord’s solicitors are generally resisting this because relevant drafting is often wide and extensive (for example covering all tenant obligations, not just payments). Landlords are likely to prefer a specific and tightly drawn rent holiday/suspension. Of course, this is likely to place risk back with the tenant, unless the parties are prepared to agree a break clause in an agreement for lease or lease.  There are concerns among landlord advisors about this type of rent suspension provision becoming standard in future even after the pandemic is over and the British Property Federation is looking into this. If insurers start to offer cover against the risk of pandemic then we might begin to see landlords take this up and pass the cost down to tenants in their leases.  

A future ban on termination provisions for insolvency events?

Most property contracts, leases, licences to occupy and a variety of other real estate agreements contain termination (or forfeiture) provisions activated by events of insolvency.  
In addition to the current forfeiture moratorium referred to above, the Government has announced proposals for important changes to insolvency law and creditor enforcement including to prevent termination of contractual arrangements triggered by insolvency. Details of any exemptions are yet to be published and it is unclear the extent to which property agreements will be caught by these proposals. The likely timescale for these reforms also remains unclear at this stage. This appears to be seen as a longer term step, to enable viable businesses to trade out of formal insolvency processes.  

We are currently advising both landlords and tenants on all these issues and more. Difficulties in related areas such as the planning process and construction contracts are also prevalent and concerning many of our clients. If you feel we can assist with issues such as these or would just like to share concerns or experiences please get in touch.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.