Commercial Leases during COVID-19
The government measures intended to reduce the spread of the novel coronavirus have caused major interruptions to thousands of businesses across the country, many of whom have had no choice but to seek an arrangement with their landlord to reduce or defer the rent payable for their business premises. Others have simply declared that they are unable to pay rent whatsoever.
Incentives for Landlords
First and foremost, landlords will be keen not to lose their tenant in the current market, for a number of reasons. Although the government announced business rates holidays for businesses in the retail, hospitality and leisure industries, they did not announce an extended holiday for empty property rates. As a result, landlords will become liable for business rates if they lose their tenant. It could be some time before a landlord is able to find a new tenant, meaning that an income producing asset could quickly become a significant liability. For many landlords, this alone may be sufficient incentive to agree a rent reduction with a tenant.
Additionally, government measures have limited the use of the usual remedies available to landlords for non-payment of rent. Under the Coronavirus Act 2020 passed in late March, landlords do not have a right to forfeit a lease for non-payment of rent until 30 June 2020. Subsequently, the government announced additional temporary measures to combat aggressive tactics being employed by some landlords. The use of statutory demands and winding up petitions for non-payment of rent has been suspended until 30 June 2020. The use of Commercial Rent Arrears Recovery (CRAR) has also been curtailed until 30 June 2020, unless the tenant owes 90 days of unpaid rent.
By these measures, the government seeks to encourage landlords and tenants to reach accommodations to cover the period of restrictions. Many landlords have been prepared to agree a compromise with their tenant and, indeed, have used it as an opportunity to extract concessions from the tenant in doing so, such as asking the tenant to give up a forthcoming break clause.
Can a Tenant refuse to pay rent?
There has been some discussion within the legal profession about whether tenants may have a legal right to withhold rent, irrespective of the suspension of landlord remedies. The argument for a right to withhold payment is that the government-imposed closure of many commercial premises has frustrated the essential bargain of the lease, i.e. that the landlord gives the tenant exclusive use of land in return for rent. On this basis, so goes the argument, the lease should be treated as temporarily frustrated until the closure is lifted, to ensure that each of the landlord and tenant is equally affected. Although there may be some relevant legal precedent from Hong Kong courts during the SARS pandemic in 2003, each lease would need to be considered on its own terms, and it has not yet been tested in the English courts in relation to the current Coronavirus regulations. Tenants would therefore be advised to try to reach an agreement with their landlord first before considering this more drastic option.
Could building insurance cover the Pandemic?
Tenants contributing towards the insurance cost of the building usually have the right to inspect the insurance policy taken out by the landlord. In some cases, the insured risks covered by the policy may include a pandemic. This would mean that certain clauses within the lease would be activated, including a suspension of rent.
Some tenants may also have business interruption cover, but this usually relates to property damage and is thought to be unlikely to be triggered by the pandemic.
How should the parties document any agreed terms?
It is important for both sides that any adjustments are recorded in a legally binding document. Although landlords may be amenable to granting relief to their tenants, they may well expect the tenant to cover their legal fees for doing so. Consideration should also be given to any service charges or insurance rent which fall due during the period of any rent adjustments.
One of the considerations for landlords and tenants is how best to document any adjustments which are agreed to. The two possibilities are through a deed of variation, or a side letter. A deed of variation is a document which amends the lease. As a lease is more than a simple contract between landlord and tenant, but constitutes a grant of an estate in the land, a deed of variation has far more formalistic requirements to be valid. A side letter, on the other hand, is a letter issued by a landlord to a tenant, in which the landlord provides a concession to the tenant from one or more tenant obligations in the lease. Unlike a deed of variation, it grants contractual rights, not property rights. In the majority of cases, the appropriate format to be used by parties in the current period will be a side letter, for the following reasons:
• It is a simpler document
• It is personal to the two parties (and therefore does not apply to an assignee if the lease is later assigned by the tenant)
• It does not usually affect future rent reviews
• It does not need to be registered at HM Land Registry (relevant if the lease is for a term of 7 years or more)
In most cases, even when using a side letter, it would sensible for the parties to retain solicitors to advise on and negotiate the wording of the side letter. However, technically it can be done by the parties directly.
However, if more major changes to the lease terms are being made, such as a re-negotiation of the rent for the remainder of the lease, it may be necessary to use a deed of variation.
Pandemic Clauses
The impact of the new world order caused by the pandemic will be felt for some time. Even as the statistics start to show a slowing down of the spread of the virus, the fear of a second wave means that new leases should give explicit consideration as to how the impact of the pandemic should affect the obligations of the parties.
Leases do not generally contain force majeure clauses, which are clauses used in many contracts to forfeit the contract if certain specified events prevent the parties from performing their obligations, e.g. war, earthquakes etc. However, parties entering into new leases will now need to include so-called pandemic clauses. These could, for example, specify that the tenant is not obligated to pay rent while lockdown measures are in force.
Land Registry relaxation of rules
To assist parties and practitioners carrying out property transactions during the period of social distancing and lockdown, HM Land Registry has announced temporary changes to the rules for identifying parties, and for registering executed deeds:
• Identity documents can be checked by a wider list of professionals other than solicitors, such as accountants, vets, police officers, teachers.
• Identity can be verified by using video calls such as Zoom, Facetime etc, as long as screenshots of the identifier and person being identified are retained
• Electronic copies of signed engrossments of deeds can be registered at HM Land Registry, without the need for the solicitor to hold the original paper copy
However, the rules concerning witnessing signatures have not been adjusted. This means that a witness would still need to be within sufficient physical proximity of the signatory to see the act of signing. This can be achieved, while upholding social distancing, by standing on the other side of a window, for example. Witnessing a signature by video call is not accepted as valid.
Please contact me by email to benjamin@patronlaw.co.uk if you wish to discuss your commercial lease.
This article is for general information only and does not constitute legal or professional advice.
