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Commercial Leases in light of COVID-19: Rent obligations

March 31, 2020

The outbreak of the novel coronavirus, COVID-19, and the measures taken by the UK government to contain it, placed a large number of tenants of commercial premises in a difficult position. Suspension of all ‘non-essential’ businesses together with stringent restrictions imposed upon individual’s freedom of movement will undoubtedly cause significant collapse in revenue for the majority of businesses in retail, leisure and hospitality and this in turn will create a challenge for commercial tenants to fulfil their rent obligations under the leases.

Some relief, at least until the next quarter payment is due, comes with section 82 of the Coronavirus Act 2020 which came into force on the 25th March 2020. It prevents landlords from terminating leases and evicting commercial tenants until the 30th June 2020 (with an option for the government to extend this deadline), countermanding the usual rule which allows a landlord to forfeit the lease after 28 days of rent being unpaid. The new law applies not only to principal rent, but to “any sum a tenant is required to pay under a relevant business tenancy”, leaving the burden of supplying services and insuring the premises on landlords.

Nevertheless, tenants should stay alert and use this three month period to consider the possibilities that might be available to them in order to protect their position, particularly, in the event that the government imposed lockdown is extended beyond the initial 3 weeks that started on the 23rd March 2020.

The legal position is that tenants will have to continue paying rent even if their businesses are not operating and the landlord agreeing to a cancellation of rent for a certain period is a very unlikely scenario. Withholding rent under a rent suspension clause is similarly unlikely as such a clause typically only applies in the event of any material damage and destruction to the premises. However, what tenants can and should do is to start a dialogue with their landlords as early as possible to try and negotiate some leeway in the form of rent concessions. The possible options include the following:

  • a rent deferment where the obligation to pay rent does not disappear but a payment plan might be agreed between the parties
  • a reduced rent
  • a rent free period
  • paying rent on a monthly rather than quarterly basis
  • paying rent in arrears rather than in advance
  • asking the landlord to draw on an existing rent deposit instead of collecting rent

Any proposals should be carefully considered in accordance with each tenant’s particular circumstances. It is extremely important to properly record any agreement reached between the parties. This could take the form of a concession agreement, serving as a temporary amendment to the lease, or a deed of variation, creating a permanent change to the lease, the latter being a form less likely to be agreed by the landlords.

The tenants should also review their insurance to see whether it might cover for any rent they have to pay whilst the premises are closed. Most businesses who have a standard business interruption insurance policy are unlikely to be covered as the insurance is dependent on damage to property and will exclude pandemics. However, some contingent business interruption policies provide broader cover, for example in the event of loss of use of the property due to the action of civil authorities or for losses caused by a notifiable infectious disease. Coronavirus became a notifiable infectious disease on the 3rd March 2020 in England and Wales. Any losses caused before this date will not be covered even if the tenants have this cover. Insurance policies differ significantly, so tenants are encouraged to check the terms and conditions of their specific policy and contact their providers.

If you are a tenant of commercial premises struggling to meet your rent obligations, our Property Team can assist with a detailed review of your lease, advise you of your legal rights and obligations and help you deal with your landlord in these unprecedented circumstances.

The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© Miller Rosenfalck LLP, March 2020

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