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Commercial tenants - collaborate and negotiate to protect yourself
- AuthorChloe Benson
It has been a busy and stressful two weeks for everybody, especially for landlords and tenants. On 20 March the government ordered all bars, cafes, restaurants, pubs and gyms to close. The following Monday, on 23 March the government announced a nationwide lockdown meaning the closure of all non essential shops. On 25 March, the Coronavirus Act 2020 (“CA 2020”) came into force, the same day that the March quarter’s rent fell due.
Tenants are no doubt relieved to hear that under CA 2020 landlords are prevented from forfeiting a business tenancy on the basis of unpaid rent between 25 March and 30 June 2020 (or later if the government extends the period). CA 2020 clarifies the term “Rent” to include any sum which a tenant is liable to pay under a relevant business tenancy (such as service charge payments).
With an undoubtedly significant number of tenants, particularly in the retail sector, withholding rent and with forfeiture temporarily suspended, landlords will now be considering their options. It is hoped that parties will take a collaborative approach and that landlords and tenants will engage in sensible discussions in order to muddle through the pandemic together.
Below are some tips and pointers designed to assist tenants during this period of disruption.
Issues Associated with Closed Premises
- Make sure your premises have been adequately secured as the last thing which you want to happen is for squatters to break in and make themselves comfortable during this period. Consider ramping up the security at your premises. The additional cost of boarding up/installing window bars/having a suitable alarm system will be a worthy investment compared to the costs of having to take legal action to remove the squatters.
- Remember to inform your insurers that your premises are closed and keep them updated. You may be required to take various steps (such as additional security) so make sure that any requirements are followed to avoid jeopardising your insurance cover.
- It is possible that your lease provides for notices to be served at your premises so make arrangements for post to be checked every so often to minimise any risks of missing an important document. Think twice about re-directing post because it could take several weeks before it is received at the alternative address. Communicate early with your landlord and ask that any correspondence including notices is also sent to you by email or to your home address.
- Check whether you have left any perishable goods at the premises and if so, arrange for these to be removed as soon as possible. The last thing you will want to do on your return is to call pest control to deal with an infestation.
Non Payment of the Rent
- Please bear in mind that CA 2020 does not prevent landlords from pursuing alternative remedies (such as Commercial Rent Arrears Recovery, serving a statutory demand, obtaining a money judgment). However, the reality is that there are various practical issues with the above making these remedies difficult, if not impossible, to pursue.
- It is sensible to formally agree any concession by way of a deed of variation or side letter. You may think that simply agreeing to defer rent is a sufficient agreement but it is prudent to clarify the terms. For example, you will need to consider how long the concession last? Will interest be charged and if so, when will it be payable from? What will happen to service charge payments? What if there is an upcoming rent review? What is the implication on guarantors and successors in title? What is the implication on break conditions? Considering this at an early stage will reduce the risk of an argument (and possibly incurring legal costs!) further down the line.
- If a concession is agreed, a landlord may use this as an opportunity to ask for something in return, such as to push back a break date, so make sure you are ready to negotiate.
- If you have served a break notice and the termination date falls during the period of disruption, double check (as soon as possible) the break clause conditions.
- If you are concerned about your ability to comply with the conditions, make early contact with your landlord to see if it will agree to waive/vary them.
- If you have agreed a rent concession and the break clause is conditional upon payment of all sums due up to the break date, you will need to check with your landlord the correct amount to pay. You do not want to rely upon the concession only to be caught out and discover that the full rent should have been paid as this will potentially invalidate the break notice.
- Remember that break notices are strictly interpreted by the courts and you should assume that they will not make exceptions during this period.
Is it possible for tenants to terminate their lease because they cannot operate?
- You may be wondering whether you can rely on a force majeure clause. Force majeure clauses (i.e. acts of god) are rarely found in commercial leases and they are not implied. However, it is worth checking your lease to see if there is a force majeure clause and if so, what it covers. Courts interpret force majeure clauses strictly and therefore even if there is a non-exhaustive list of events within the clause, this argument may be difficult to run.
- Can you argue that the lease has been frustrated? Whilst case law has supported the possibility of this being possible in principle, there is no reported case in English law of a case terminated by frustration. As the period of closure is likely to be relatively short in comparison to the length of your lease, it is unlikely that you will be able to successfully argue that your lease has been frustrated.
- Check whether there is a contractual way for you to terminate your lease. For example, are you approaching the end of your contractual term? Can you serve a notice under section 27 of the Landlord and Tenant Act 1954? Is there a break right within your lease?
- If you are occupying your premises as a tenant at will, you will have the right to terminate without the need to give any notice. If you are a licensee then check whether there are any specific termination provisions under your licence agreement.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article, please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.
Real Estate Dispute Resolution at Goodman Derrick
Our Real Estate Dispute Resolution team has a wealth of experience in both the commercial and residential property sectors.
Our lawyers work closely with the firm’s non-contentious Real Estate group to provide dispute resolution support and assistance when it is required. Our advice is focused on facilitating practical and commercial solutions.
Our approach ensures that problems are resolved in the most cost effective way and at the earliest stage. We know that our clients will want to avoid litigation in the courts but if matters need to be hard fought then we are highly experienced at dealing with cases at all levels of the court system.
We advise our commercial clients on every type of landlord and tenant dispute in relation to both freehold and leasehold property. We have become well known for advising in relation to complex developments such as shopping centres and large mixed use sites.
Our commercial clients include nationwide retail chains, property developers, investors and managers of substantial portfolios as well as international organisations with UK property interests.
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