Taking the Path of Lease Resistance: Managing Your Commercial Tenancy as a Tenant During the Lockdown

As we go into the 5th week of lockdown (and as noted in commercial update 1),  this update is focused on leases and the conversations we are being made aware of between landlords and tenants.

As the lockdown continues, it will become more inevitable that some businesses will struggle with lower turnovers and poor cash flow.

In our previous guidance, we talked about the importance of looking to negotiate the terms of your key contracts if possible.  For many of your clients, the most important of these is the renegotiation of terms between a landlord and tenant.

This guidance looks at the tenants perspective and offers some guidance on suggesting some or all of the following direct concessions:

  • a rent deferment; and/or
  • a rent free period; and/or
  • discounted rent; and/or
  • a service charge reduction.

Please remember that with a rent deferment, the obligation to pay rent does not go away, but a payment plan would need to be agreed between the parties for the deferred rent.

Normally, landlords will generally want to avoid having vacant units and, with the ongoing uncertainty, may be reluctant to take drastic action against tenants.

We know that the temptation may be to set any concession out in an informal agreement, but we’d counsel against it.

When looking at  any of these, the drafting needs to be accurate and specific. For example, if the rent is to be postponed, for how long will this be for? What would be the time limit on how long any rent holiday is to be? How would any agreement be ended?  Which rents would be covered by the agreement – all rents payable under the lease or just the principal rent?

We have an outstanding commercial property team at Spire led by Protima Sikdar-Wood, who can advise on the best way forward.

Please also remember the fiscal help on offer at the moment.

A review of these measures could be an update all on its own, but the key ones for tenants include:

  1. The Small Business Grant Fund – all eligible businesses in England in receipt of either Small Business Rates Relief or Rural Rates Relief in the business rates system will be eligible for a payment of £10,000.
  2. The Retail, Hospitality and Leisure Grant Fund – eligible businesses in England in receipt of the Expanded Retail Discount (which covers retail, hospitality and leisure) with a rateable value of less than £51,000 will be eligible for a cash grant of £10,000 or £25,000 per property. Please note that businesses with a rateable value of £51,000 or over are not eligible for this scheme plus businesses that are not ratepayers in the business rates system are also not included in this scheme;
  3. The business rates holiday for the 2020 to 2021 tax year – you are eligible as a business if:
    1. Your business is based in England
    2. Your business is in the retail, hospitality and/or leisure sectors.

The government does not consider certain types of property being used for the provision of the following services to be eligible for the purpose of this relief (e.g. financial services, medical services and professional services). It has been left for local authorities to consider their eligibility for the relief under their local scheme, so advice is essential;

  1. We’ve talked in earlier updates about the Coronavirus Business Interruption Loan Scheme, which provides eligible businesses with access to loans, overdrafts, invoice finance and asset finance of up to £5 million for up to 6 years. Under this, the government will also make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees.
  2. The measure that all businesses should now be looking to use, is the Coronavirus Job Retention Scheme to support employers whose operations have been severely affected by COVID-19. For further details on this and any HR/Employment advice, please contact our excellent employment specialist Lucy Churchill.
  3. Guidance has been introduced to the effect that commercial tenants who cannot pay their rent because of COVID-19 will be protected from eviction. These measures will mean no business will automatically forfeit their lease and be forced out of their premises if they miss a payment up until June.
  4. Please also remember the proposed introduction of a time limited permitted development right to allow the temporary change of use of a pub (A4 – drinking establishment) and a restaurant (A3 – restaurants and cafes) to a hot-food take away for a period of up to 12 months and finally the option to defer VAT payments for 3 months if you are a UK VAT registered business and have a VAT payment due between March 20, 2020 and June 30, 2020.

You should in every case also have a look at the terms of your lease. This may be more helpful than you think. For example, while most leases only provide for rent to be suspended if the subject property is no longer fit for occupation (e.g. in the event of a fire or flood), it may be that you could be entitled to a reduction in your service charge payments, if your landlord can no longer provide access or the usual services.

Don’t forget checking to see if you have an appropriate break clause – these allow the party with the benefit of them to terminate a lease early, usually by serving notice in advance of a specific date (known as the ‘break date’). Remember to get obtain proper advice from Protima and her team before attempting to exercise any break rights as break clauses can contain a list of conditions that tenants need to comply with in order for the break to be validly exercised . These have to be got exactly right to enable the break to work, so make sure you get advice on them.

It may be that you are  able to surrender your lease. This essentially means that both you and your landlord agree to bring the lease to an end.

If the contractual term of your lease has expired, you will have the right to bring your lease to an end by serving notice on your landlord. The required notice period will vary and you will need advice to get any notice right.

Our key take away, which we spoke about earlier in the lockdown, is that if you face financial difficulties as a result of coronavirus, you should talk to your landlord as early as possible as our experience is that concessions are being discussed.

Please get in touch either via me or direct to our commercial property and/or employment teams on the details above – hopefully, we can help.

Stay safe and well.