Pandemic rent suspension clauses
Most commercial leases provide for the rent to be suspended for a limited period in the event of damage caused by an insured risk (such as a fire) making the property unfit for occupation and use. One major change as a result of the pandemic has been the extension of those provisions in some commercial leases to circumstances when the property cannot be used for a reason relating to a pandemic (usually where a “lockdown” is in force).
The type of clause being used tends to be a variation on a theme, and say that the rent (or an agreed percentage of it) will cease to be payable if government rules relating to Covid-19, or another pandemic, prevent the property being used. Without such a clause the tenant has to carry on paying the rent even though it cannot use the property. The percentage of the rent to be suspended has to be agreed between the parties; most tenants look for 100% but we have seen lower percentages and the outcome depends on a commercial negotiation between the parties.
These clauses are starting to appear not only in leases to new occupiers but also in renewal leases. We are finding that some landlords of renewal leases are accepting their inclusion (especially in leases to retailers with many stores) even though this will be a departure from the current form of lease. The general position under the Landlord and Tenant Act 1954 is that the same form of lease is used on a renewal.
Related issues that need to be considered are:
- the extent to which the suspension applies if people are just advised to work from home
- the period for which the suspension applies
- whether insurance premiums and service charge are suspended as well as the main rent
A more complex issue can arise for an essential retailer in, say, a shopping centre which is able to stay open but loses much of its footfall as a result of a lockdown. Such a tenant may argue that the rent (or an agreed proportion of it) should be suspended if the non-essential retailers in that centre are required to close given the likely adverse effect on the essential retailer.
On the other side, landlords may feel that a tenant that has to shut down as a result of a breach by the tenant of the coronavirus rules should not benefit from a rent suspension (although we would hope that such cases will be few and far between).
It looks as if these new rent suspension clauses are here to stay. Tenants that would be affected by a lockdown would be well-advised to raise this point at heads of terms stage to avoid debate and delay later in the transaction.
Energy efficiency legislation
Another issue that has started to crop up regularly in commercial leases relates to the impact of the energy efficiency legislation on both landlord and tenants.
At present, a landlord cannot
grant a lease of commercial property if the property has an energy efficiency rating of F or G (ie it is sub-standard) but from, and including, 1 April 2023 a landlord of commercial property will not be able to
continue to let a property if is sub-standard. The general rule will be that the landlord will be in breach of the legislation if a commercial property that is subject to a lease has a rating of F or G on 1 April 2023, but the validity of the lease will not be affected.
There are some limited exemptions to these rules (the exemptions need to be registered by the landlord or their agents) but, to correct a common misconception, listed buildings are not automatically exempt.
Accordingly, landlords of commercial properties should be looking now at their portfolios and deciding where works need to be carried out in order to improve the energy efficiency of a property to a rating of E or above. Landlords should also consider whether, in the case of a let property, the tenant is required to allow the landlord to carry out the related works (and any conditions within which the landlord should comply). When entering into new leases, landlords should consider the rights of access that may be needed.
Well-advised tenants are now looking to ensure, in both new and renewal leases, that they do not have to carry out any energy efficiency works themselves or pay for the cost of such works (whether through a service charge or otherwise). This is a point that can be raised by tenants at heads of terms stage. Tenants always need to bear in mind that there is no legislative protection in respect of the level of commercial service charge and that service charge provisions are often drafted very widely. Tenants should also think about protections to apply if their landlord seeks to carry out energy improvement works.
Both parties should also work on the basis that it is likely that the minimum permitted rating will increase from E over the next few years and consider with their surveyors whether there is any potential effect on rent review provisions.
Read our other predictions for 2022