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Commercial tenants – beware!

15 Apr 2020

In such difficult times, The Coronavirus Act 2020 (‘the Act’) provides comfort to many business tenants unable to pay the rent and other outgoings (e.g. insurance, service charges and/or interest) for the period March 25 to 30 June. Whilst it remains to be seen whether the current moratorium continues beyond this date, the following concerns linger:

Forfeiture

  • The Act simply restricts the landlord’s ability to forfeit a lease for non payment of rent during this period. It does not prevent a landlord exercising other remedies (for non payment), such as serving distraining for rent, serving Statutory Demands and/or presenting a Winding Up Petition, drawing on a rent deposit (and requesting a ‘top up’) or claiming arrears against guarantors.

Rent Deferrals

  • In the absence of agreement, the moratorium will defer rather than waive the obligation to pay rent during this period. Accordingly, rent arrears will accrue along with the obligation to pay interest as specified in the lease. Negotiations with landlords may, therefore, include requests for rental or interest waivers; payment in arrears rather than in advance; monthly rather than quarterly payments etc. If agreed, these should be property documented.

Covenants

  •  Aside from non payment of rent, tenants should continue to comply with the remaining covenants in their lease. Many leases impose obligations to report an ‘event’ (e.g. water ingress) so that the landlord can address the issue and/or notify building insurers. Failure do so may otherwise shift liability from the landlord on to a tenant in respect of damage to the property.

Break Clauses

  • Many leases include a contractual right to break the lease during the fixed term. For a ‘break notice’ to be effective, strict compliance with the terms of the lease are required. However, if a break clause is ‘conditional’, this may cause practical problems. Many leases impose an obligation for all outstanding rent to be paid by the break date and/or for vacant possession to be provided. In the context of the current lockdown, cash strapped tenants may have to pay all outstanding arrears and/or a full quarter rent in advance, which will not be easy.  Similarly, the inability to clear premises by the break date may lead to arguments that the tenant has failed to provide vacant possession. Failure to satisfy either requirement could negate validity of the break notice.
  • Greater concerns arise where the break clause is conditional on compliance with all covenants in the lease. This would include an obligation on  a tenant to put premises in good and ‘compliant’ repair by the break date. Given the obvious difficulties in engaging dilapidations surveyors and/or contractors to carry out works prior to the break date, it is easy to see aggressive landlords seeking to rely on the strict wording of the clause to nullify the effect of the break notice. If successful, this may have dramatic consequences for tenants (and their guarantors) if leases continue for the full length of the term.

Summary

The Covid-19 pandemic is unprecedented and is having a major impact on the    commercial property sector. It remains to be seen whether current and future   legislation seeks to soften, or market forces serve to harden, landlord and      tenant relationships.
 

Further reading

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