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Coronavirus and key considerations for commercial leases

The pandemic has had a major impact on commercial lettings

The past 15 months have seen challenges for all individuals and business across all sectors as a consequence of the Coronavirus. Our Government’s approach, and the approach of many governments across the world, was to impose lockdowns whether locally or nationally.

Lockdowns, in any form, interfere with the majority of commercial tenant’s businesses from the way they trade, when they can open and even what they can sell, and many businesses have had to close their doors for good as a result. Over the last year or so one of the main concerns for commercial tenants is “do I have to pay my rent even though I am not permitted to trade?”

Yes – commercial tenants need to pay rent.

The short answer is - yes. Whilst the Government introduced various measures to help businesses in these testing times - including temporary suspension of business rates, the furlough scheme to assist with employees’ salaries and deferred payment of VAT - the rent payable under a commercial lease (which is arguably one of the largest overheads for any business after wages), was not provided for in the Government’s package of support measures. A commercial lease is a contract between the landlord and the tenant to, amongst other things, pay rent as and when the lease dictates.

Where do commercial tenants stand?

Some commercial tenants have tried to put a case forward whereby they have argued that they are unable to use their premises (due to the Government’s restrictions) and so they should not have to pay the rent. Unfortunately, this is not the case because the lease creates a contract between the landlord and tenant and a promise to pay rent. The lease will provide for payment of rent to be suspended, but only in limited circumstances such as destruction of the premises. The rent must be paid, pandemic or not.

Solutions for tenants

Agreement with landlord for rent suspension

The exception to this general rule is where the landlord and tenant can agree otherwise. A tenant should approach the landlord and try to negotiate a rent suspension and/or rent concession. Whilst not an ideal situation from the landlord’s perspective, agreeing to such measures in the short-term may aid the long-term viability of the business and consequently, rental income, particularly if the property may be difficult to relet post-pandemic.

Whilst tenants of existing leases have limited options when it comes to payment of rent in absence of an agreement to a rent suspension or concession there are options for incoming tenants taking new commercial premises which should be taken into consideration when negotiating heads of terms such as break and rent suspension clauses.

Check for existing Break Clauses.

Break clauses are common in fixed term commercial leases but often forgotten by tenants when negotiating the terms of a new lease. Breaks provide for the tenant to terminate the lease at fixed points during the lease term, without reason but on the basis that a sufficient notice period is given to the landlord, usually 6 months. The lease often specifies that the break will only be validly exercised if certain conditions are satisfied such as rent being paid up to date and there being no breach of other terms of the lease. Provided the tenant has complied with the lease provisions there should be no reason why the break cannot be validly exercised although legal assistance should be sought to serve the notice to ensure it is done correctly. Failure to serve the break notice correctly could mean the difference between ending the lease and being released from liability to pay rent or remaining liable for the remainder of the term.

Negotiating lease terms with the landlord

When negotiating the terms of a new lease the tenant should carefully consider its business model and try to determine when the ‘pinch’ points may arise. Around 60% of new businesses fail during the first three years and with that in mind tenants may opt for a break around the third anniversary of the lease.

Whilst the coronavirus pandemic and any future pandemics cannot be foreseen the existence of a break in the lease can be exercised for any reason and no doubt there will be tenants that are now relying on those breaks to escape their obligations under their commercial leases as the impact of the virus is felt.

COVID-19 rent suspension clauses

Whilst all restrictions were lifted on 21st June there is a lingering feeling that we may have not seen the back of lockdowns. With that in mind tenants should consider negotiating the inclusion of a clause that suspends the payment of rent if mandatory measures imposed by Government require the tenant to cease use of its premises or requires the landlord to restrict or prevent access to the premises.

If either of these conditions are imposed the clause would take effect and suspend the rent for the period when the Government’s measures were imposed until an agreed date after the measures are lifted.

This clause may seem on the face of it to only benefit the tenant but as we see a move towards long-term home working and possible slow recovery of the economy the demand for commercial premises may suffer and landlords would be wise to consider terms they may not have previously considered if the result is to secure a tenant and rental income.

Negotiating the heads of terms is the perfect time to consider the future needs of the business and ensure that you have safeguards in place to deal with situations like coronavirus and break free of the lease.