Landlords and Tenants: Maintaining relationships during lockdown

When the government first announced the closure

of public entertainment venues we published a comprehensive article on the impact of Covid-19 on commercial property (focusing on the closure of the leisure and retail industries). To read the full article please visit our website www.farrer.co.uk and search “COVID-19:

Impact on Landlords and Tenants” 1 . In the few short

weeks since the government’s announcement things have changed drastically, so this is an update on how commercial tenants and landlords might approach the current crisis.

With full lockdown to last at least another two weeks and no real indication of an exit strategy or timeline, all non-essential businesses are now affected by closures. Since lockdown came into effect, we have been discussing with our clients the impact of landlords closing, or restricting access to, buildings or paring back services in multi-let properties.

The decision to close or restrict access to a property for the lockdown period may be considered by landlords as a reasonable (or even their only) option in the current climate. There are, of course, a host of valid reasons for landlords to consider doing so including: security, health risks to staff required to remain on site (i.e. security personnel, reception staff etc) and the difficulties of calling out contractors to fix issues with utilities and infrastructure. Indeed, this may be considered to be mutually prudent, as tenants too will benefit from the reduction in the cost of services that will lead to a smaller service charge bill (albeit a close look at the terms of the lease will be needed to ensure that any savings are passed on). There is also the practical consideration that most tenants and their employees will be working from home and will not need regular access to premises for the foreseeable future. this could amount to “frustration” of a lease. This is known as “derogation from grant” and gives rise to a tenant’s right to seek relief from the court. Such relief is typically achieved through either: (i) specific performance (i.e. forcing the landlord to reopen), or (ii) damages. For the latter, the tenant needs to show they have suffered a loss as a result of being prevented access (which may be difficult to prove against the backdrop of mandatory lockdown and the public policy decision to stay home to save lives) and/or the cost of rent for premises that they have been unable to access. Given the difficulties the court system is currently facing, and the legal costs associated with court proceedings, it is perhaps unlikely that a tenant would be able or willing to make such a claim in a sensible time frame. This option is therefore unlikely to be realistic for most.

That is not the end of the road, though. Another option for tenants could be to exercise break rights or look for other ways to “get out” of their lease obligations early. Again, this will require a close reading of the lease terms and a full consideration of any conditions attached to a break right (e.g. the full payment of rent up to the break date and the need to return the premises with vacant possession). Landlords should be mindful of pushing tenants to the point of choosing to exercise break rights, or otherwise look to bring leases to an early end. This would leave landlords with empty buildings at a time when perhaps agreeing to receive a lower level of rental income, or the promise of future income, is a better position to be in than having to deal with the additional liabilities that would arise upon the premises becoming vacant.

Alternatively, tenants may decide to try to withhold rent. As we know from the media, it seems that this is now a common choice for tenants. However, tenants should be alive to the reality that rent unpaid during this period without a formal agreement constitutes a breach of the lease, which is capable of enforcement by the landlord (albeit using more limited options) so, this is not a long-term solution. Whilst the remedy of forfeiture of a lease is prohibited until at least 30 June, other ways a landlord can look to enforce rent recovery include issuing

proceedings to recover the “debt” or serving a Statutory Demand as the first step towards winding up proceedings. This may seem an extreme option, but it is one to which some landlords have already resorted.

All of these are quite extreme, potentially nuclear, options. What mutually beneficial or collaborative options are available? Our advice is that now more than ever is the time to keep the lines of communication open between landlord and tenant. As we are continually reminded these are unprecedented times, and we will require unprecedented approaches to see us through. The government is encouraging landlords to be understanding of the needs of their tenants, and yet it is often the case that landlords have little choice but to act if they need to service their own debt or otherwise discharge their liabilities. It is essential in our experience, however, that parties work together to reach the best way forward.

Before agreeing any concessions, parties should look closely at the availability of business interruption or loss of rent insurance to help meet the rent liability. Insurers have been reluctant to accept liability to date, but increasingly they are coming under pressure from the government to do so. If an insurance claim is not an option, common alternatives are arrangements to pay rent monthly rather than quarterly, or for a period of rent deferral (with the rent being repaid over the course of several months in the near future). Full rent waivers or rent-free periods are less common, although they are occurring. Any concession agreements should be properly documented, to avoid any future uncertainty (e.g. for the exercise of a break right which is conditional on the full payment of rent) or unintended consequences (including taxation for landlords).

Whilst it may seem counterintuitive to landlords, being flexible and innovative in their approach to the weeks ahead may be just enough to help tenants keep their businesses afloat, and therefore keep them in occupation. Equally, tenants are well advised to be aware of the liabilities that their landlord may have which will be relevant in any negotiations. Cooperation and communication will hopefully lead to fewer empty buildings, and a lot more goodwill between landlords and tenants, when we eventually come out the other side. ■

Meghan Hatfield Farrer & Co.

1. https://www.farrer.co.uk/news-and-insights/ covid-19-impact-on-landlords-and-tenants/?utm_ source=vuture&utm_medium=email&utm_ campaign=%7bvx:campaign%20name%7d_%7bdate%7d

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