By Milan Patel
The UK Government has recently announced further steps to protect commercial tenants from aggressive rent collection by landlords including a ban the use of statutory demands and winding up orders where a company cannot pay their bills due to COVID-19 and preventing landlords from using commercial rent arrears recovery (CRAR) unless 90 days or more of rent is unpaid. These measures support the existing ban on landlords evicting commercial tenants. All of these measures will remain in effect until at least 30 June 2020.
Does that mean commercial tenants can now relax?
Definitely not. These measures are temporary and do not alter the terms of the lease. Once they are lifted, landlords will be free to employ such collection methods again and while some landlords have deep pockets, many more do not and almost all will have investors and/or funders to satisfy so it is highly unlikely that unpaid rent will simply be ignored for long once these protection measures end.
So what should commercial tenants be doing now?
If you are amongst those tenants who decided not to pay your rent and you have not already entered into or begun negotiating a concessionary arrangement or deferred payment plan with your landlord, you should do so as soon as possible. Your landlord may have remained silent but that does not mean they have accepted the position. Remember that while your landlord is under no obligation to agree to a concession and/or payment deferral, there will be sound commercial reasons why it might decide to do so. The Royal Institution of Chartered Surveyors (RICS) predicts that COVID-19 will result in a reduction in demand particularly for retail and office space unless in prime locations and the adaptation to virtual working forced by the COVID-19 lockdown means many office occupiers are re-assessing the extent to which working from home can sensibly become (and to meet social distancing requirements may need to become) the ‘new normal’ substantially accelerating the existing trend towards reduction of footprint. Given the uncertainty that is likely to cloud the market generally, no landlord will be keen to take back possession of a commercial property or force its tenant into insolvency in the short term. Many will already have enough unlet properties in their portfolio to worry about. That said, simply saying the word ‘Coronavirus’ is unlikely to result in a landlord magically waiving unpaid rent. To date, the Government has not provided any assistance or protections to landlords and they will have investors and/or funders to answer to. A landlord is more likely to give your proposal sensible consideration if it is well presented, backed by clear evidence of the adverse impact of COVID-19 on the financial performance of your business and takes account of the fact that the landlord is in a business which has also been impacted by COVID-19 and has employees, investors and funders it will need to justify its actions to.
To the extent that they can, tenants should also consider paying the rent arrears. While the initial reaction of many commercial tenants to the COVID-19 lockdown was to not pay their March quarter rents, unless such tenants have already reached agreement with their landlord for a rent concession or deferred payment arrangement, they should actively review if they are in a position to pay some or all of the sum due. Making or at least offering part payment should create some goodwill with the landlord which may assist in negotiating a rent concession or deferred payment arrangement for the balance. To the extent payment is not made, tenants should also be conscious that penalty interest is likely to be accruing under the terms of their lease.
Tenants should also review the terms of their lease and consider their longer term aims and objectives. Do you have an break option coming up or is the term nearing its end within the next year or two? If so, the landlord may be willing to trade an immediate rent concession/reduction for removal of the break option or an extension to the term. If not, it will nevertheless be useful to know if you are able to terminate your lease early particularly if the rent is likely to exceed post COVID-19 market levels. Break options often have lengthy notice periods and most will be subject to strict conditions including a requirement that all rent has been paid up to date is a common one so if that is a route you are considering legal advice should be sought early.
While the Government may have taken steps to protect commercial tenants in the short term, they did so with a clear recognition that tenants will ultimately remain liable to pay their rent and must seek to enter into sensible discussions with their landlord to reach an amicable agreement to address any rent which they are genuinely unable to pay due to the impact of COVID-19. That is the sensible approach for both landlords and tenants in light of an unprecedented global pandemic which neither party could have predicted.
For More Information
Please contact Milan Patel or another member of your Duane Morris London Team.