The UK lockdown’s impact on commercial landlords and tenants

Answer

From 23 March 2020 to 14 June 2020, the forced closure of all 'non-essential' businesses, including the majority of retail outlets, meant that many commercial tenants were left struggling to afford their rent. In addition, the lockdown impeded the ability of many tenants to comply with their usual covenants (obligations imposed by their lease). The unavailability of services – such as those provided by electricians and removal companies – prevented tenants from adhering to their obligations to repair or even hand back their premises at the end of their leases.

As England is now in a second lockdown, the issue of how property owners and commercial tenants should approach the sticky subject of rent arrears, rent concessions and breach of covenants may once again come to the fore. 

Existing tenancies and rent arrears

The government is keen to promote collaboration between landlords and tenants, in order to mitigate against the 'income shocks' of lockdowns. On 19 June 2020, a voluntary 'code of practice for commercial property relationships during the covid-19 pandemic' was published, which encourages the parties to consider themselves as 'economic partners' and to act reasonably and responsibly when it comes to enforcing the terms of a lease.

The government has bolstered this voluntary code with legislation protecting the majority of commercial tenants from eviction due to unpaid rent:

• Section 82 Coronavirus Act 2020 restricted all forfeiture proceedings as a result of unpaid rent between 26 March and 31 December 2020;
• the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 increased the minimum amount of rent that must be in arrears before a landlord is permitted to take action using the Commercial Rent Arrears Recovery procedure from 7 days of rent arrears, to 276 days’ outstanding rent on September 29, and to 366 days’ outstanding rent on 25 December; and
• the Corporate Insolvency and Governance Act 2020 prohibits the presentation of a winding-up petition based on an unpaid statutory demand for rent payment served between 1 March 2020 and 31 December 2020 (albeit there is an exception if it can be shown that the failure to pay rent is not due to the pandemic).

Although the above legislative measures have been brought in to assist tenants during this period of uncertainty, tenants still remain liable for their rent under their tenancy agreements.  

However, many landlords have taken a commercial approach to their tenanted premises and have worked with their tenant to agree a payment plan for any missed rent. This may include a 'payment holiday' whereby rent is not payable for a specified amount of time, or a rent concession period where the usual amount of rent due is reduced. There are several factors which a landlord may wish to consider when contemplating entering into a payment plan:

• the nature of the existing relationship and the tenant’s previous track record with their rent payments;
• the reason for the tenant’s failure to pay rent and the steps they are taking to address the situation;
• the take-up of any support already offered to the tenant (either by the landlord or the government); and
• market conditions for the re-letting of the commercial premises.

The final agreement reached will be the result of negotiation and pragmatism toward the unchartered territory that both parties have found themselves in. A landlord may consider that the benefits of a tenanted property (even with a tenant paying reduced or no rent) outweigh the liabilities of an unoccupied premises, including: possible future liability for business rates; insurance and security costs for an empty premises; and utility charges for keeping the building in good shape with heating and ventilation.

New tenancies

A landlord seeking to negotiate a new lease with a prospective tenant may consider providing for the scenario of another lockdown or mitigating against other effects of covid-19 in the lease itself. 

A 'pandemic clause' could set out the procedure to be followed in the event of a lockdown (or similar measure) providing a degree of certainty for both parties. Such a clause could:

• provide for a rent reduction, holiday or deferment during a period of lockdown;

• prevent a landlord from taking steps to enforce a tenant's repair and maintenance obligations which a tenant has been unable to comply with or remedy due to lockdown, until a reasonable period of time after the end of lockdown;
• provide for flexibility in the service charge provision to enable the landlord to recover their costs in the event that additional and enhanced cleaning and sanitising of the premises is required;
• set out the procedure to be followed in the event that the lease term comes to an end during a period of lockdown;
• provide an exception to a 'keep open' clause during a period of lockdown, when legislation prohibits a tenant from legally complying with their obligation to keep their business premises open for certain hours/times; and
• allow for a delay of the rent review process, so that it commences after a reasonable period of time post-lockdown. Although the valuation date is usually fixed, it is likely to be easier to reflect more optimistically on a valuation once the worst has passed.

Taking a collaborative approach to the initial negotiation of a commercial lease may assist in setting the tone for the remainder of the business relationship. The additional security gained from clarifying the procedure to be followed in the event of a lockdown, and reducing the likelihood of a dispute or the tenant defaulting on payments completely, may mean that a landlord is willing to agree clauses that provide the tenant with more flexibility than would otherwise (normally) be acceptable. However, the willingness of institutional landlords to inject flexibility may be fettered by the attitude of commercial property investors and the market conditions.

Lydia Robinson is a solicitor at Michelmores. She is based in the firm’s specialist real estate team.