Covid-19 & Commercial Leases: A Guide for Landlords

Who takes the COVID-19 hit under a commercial lease, the Landlord or the Tenant and is there anything that Landlords and the Government can do to help and retain a good Tenant through the current situation?

Can my tenant bring their lease to an end?

No – A tenant cannot automatically bring their lease to an end due to the impact of COVID-19, unless there is specific provision within the lease.

A tenant will be able to bring their lease to an end if they reach the end of the contractual term, or if they successfully exercise a break clause, which is a provision that may or may not be included in a lease giving either the landlord or the tenant the ability to terminate it.

If the contractual term of the lease has already expired but the tenant has remained in the property beyond this having continued to pay their rent, it is likely that they will be on what is called a “holding over” tenancy and they would then need to give a landlord 3 months’ notice to terminate.

A tenant may argue that the outbreak of COVID-19 constitutes a “force majeure” event (an event beyond their control) which prevents them from carrying out their obligations under the lease. This must be specifically set out within the lease which is not currently common practice.

Can my tenant stop paying rent?

No – A tenant cannot stop paying their rent due to the outbreak of COVID-19 unless the lease states otherwise.

A standard commercial lease will usually only allow suspension of rent where the property is damaged or destroyed by a risk that would be covered by the landlord’s buildings insurance policy, to the extent that the property becomes unusable.

You should check the terms of the lease to see under what circumstances rent can be suspended.

Can I terminate the lease if my tenant doesn’t pay rent?

Not for the time being – this right, which is normally available to landlord’s with a suitable provision in the lease (known as forfeiture) has been restricted by the Government to help tenants affected by the current situation.

Until the 30^th June 2020, you will not be able to exercise a right of re-entry or forfeiture for non-payment of rent. Rent includes any sum that a tenant is liable to pay, for example annual rent, service charge and insurance rent. The Government may extend this period further.

These protective measures do not seek to restrict a landlord in relation to remedies available for any other breach of obligation under the lease.

Can I use my tenant’s deposit to cover missing rent?

If you hold a rent deposit, then you may be able to use the monies held to cover rent payments that are due but haven’t been paid. You will need to check the document that regulates how the rent deposit is dealt with (usually known as a “rent deposit deed”) to see under which circumstances you can make a deduction from the deposit.

What can I do if my tenant stops paying rent?

Currently, the Government protective measures only restrict the right of re-entry or forfeiture for non-payment of rent and therefore the rent remains due.

You may therefore wish to consider the following:

• Court proceedings to recover debt – A landlord can still issue court proceedings against the tenant to recover rent or other sums due under the lease and enforce payment through the courts in the usual way.
• Commercial Rent Arrears Recovery – A landlord can instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears.
• Insolvency Proceedings – Where the tenant has failed to pay rent or other sums due under the lease, the landlord may wish to consider commencing insolvency proceedings. Where there is no dispute as to the amount of the debt, the landlord can serve a statutory demand on the tenant, which gives the tenant a period of time to pay before a landlord can then issue proceedings for the bankruptcy of an individual tenant or the winding up of a company tenant.
• Guarantor – A landlord may have the benefit of a guarantor and be able to issue court proceedings against another party who gave a guarantee for the tenant’s rent payments.

Should I speak to my tenant about their rent payments?

Yes – whilst this is a difficult time for landlords, it is an equally difficult time for tenants.

We all hope that the current situation will be a short term impact and that incomes and rent payments will come back. Good tenants can be hard to find and this may not be the right time to throw the baby out with the bathwater.

Whilst it is likely that any applicable right of re-entry or forfeiture for non-payment of rent will become available to landlords after the period of the Government’s protective measures, landlord’s should consider whether there is value in negotiating a solution with the tenant to deal with the outstanding payments whilst keeping the landlord and tenant relationship, rather than being faced with the prospects of an empty property, particularly if the liability for business rates then falls back on the landlord.

You may wish to consider agreeing a payment plan with the tenant for any arrears in rent, or any other sums due under the lease. This could include:

• Payment within an agreed timescale after the protective measures are lifted.
• Payment of an increased rent for the remainder of the term.
• Payment of the arrears in the last 3, 6, 9 months of the lease.

It is important that any agreement is clearly documented by way of a side letter or formal variation to the lease.

It may be that tenants are not aware of the other Government support packages that might be available to them such as:

• The Coronavirus Job Retention Scheme, allowing employers to place employees onto “furlough” and claim back 80% of their wages upto £2,500 per employee;
• Small business grants of upto £10,000 for businesses claiming small business rate relief;
• Self-employed grant scheme;
• Business rates holidays for retail and leisure businesses;
• The Deferral of VAT payments and income tax payments on account;
• The Coronavirus Business Interruption Loan scheme.

Being aware of these schemes may allow you to make your tenants aware of support that they might be entitled to that allows rent to continue to be paid or make the difference between your tenant surviving the current situation.

If you require assistance from anyone in our Commercial Property Team or Commercial Litigation Team to assist you and provide legal advice to help you understand your options along with any issues that could occur, please do not hesitate to contact us on 01623468468 or use the enquiry form below.