The coronavirus pandemic has undoubtably led to significant challenges for the commercial property sector, with many businesses being forced to close or drastically change the way they operate.
While the government has implemented schemes to help businesses, both commercial landlords and tenants are faced with difficult decisions around protecting assets and maintaining cash flow to help weather the tough financial situation.
Here, Eleanor Longworth explores what the current situation means for commercial landlords and tenants, and provides some practical advice.
A joined-up approach
Opening a conversation about the struggle both parties are facing, and attempting to find a collective arrangement, should always be the starting point.
In practice, there is little landlords or tenants can do to extricate themselves from a binding contractual relationship, so a joined up approach will attempt to ensure the survival of each business, in the hope they will be able to continue to operate together once the crisis is over.
Debt collection limitations
The Coronavirus Act 2020 prevents landlords from taking action to forfeit or terminate a lease of commercial premises for non-payment of rent, while tenants are also to be given more breathing room to pay rent by the banning of Commercial Rent Arrears Recovery (CRAR), unless landlords are owed 90 days of unpaid rent.
These measures apply until June 30, 2020, although this date could be extended.
The government has not stipulated that tenants do not have to pay rent, and although this restriction does not currently apply to other breaches of a lease, in practice all possession proceedings are stayed, meaning landlords are unlikely to be able to bring a lease to an end anytime soon.
Cash flow issues
Landlords may not want to take such drastic action anyway, as they will likely be left with vacant premises and no rental steam.
Unless rents have been unpaid for more than 90 days, landlords are unable to collect debts using Commercial Rent Arrears Recovery (CRAR), and landlords are to be prevented from serving statutory demands or issuing petitions for bankruptcy or winding up, until at least June 30, 2020.
While the clear objective is to ease the financial burden on tenants, many landlords will now be faced with their own cash flow issues, given that rental streams often help pay their own debts.
Can a tenant terminate a lease?
Some tenants may have closed their premises and be considering if they can terminate their leases.
Unless a lease is due to come to an end or has a contractually enforceable break provision, tenants may be under an obligation to continue to make payments to the landlord for the remainder of the contractual term, regardless of whether they are trading.
Clearly, if tenants are hoping to continue to trade in the long run, termination may not be in their best interests.
Alternative approaches
Landlords and tenants should discuss alternative approaches at the earliest opportunity and carefully document any new arrangements. While the landlord is not under any obligation to make any concessions, a collaborative approach appears to be the preferred option for many landlords.
These may include payment holidays, variations from quarterly to monthly payments or in some, albeit relatively rare cases, a temporary waiver of rent. Tenants may wish to consider whether they are willing to provide something in return, perhaps to make the concession more favourable or appealing to a landlord. This could include an extension of the lease term, removal of a break option or foregoing certain rights under a lease.
A landlord’s ability to agree any concessions, even temporary, may ultimately be dependent on its lender.
Banks will play a key role and it is hoped that support can be offered to ensure businesses can survive and continue to trade both during and after the crisis.
The current outlook
While many landlords and tenants are attempting to work with each other during the pandemic, the options available will come down to the terms of the contract/lease, which may be further restricted by government-imposed schemes.
The current arrangements do, however, present an opportunity to re-gear leases, potentially making business relationships more commercially viable than they would have been before.
For more information on payment arrangements or any commercial property disputes matter, contact Eleanor Longworth on 0161 761 8082 or email her at eleanor.longworth@whnsolicitors.co.uk
