Covid-19 Lockdown: Property – Q&A for Business Tenants
21 May 2020
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It is unquestionable that tenants, particularly in the retail sector, have been severely affected by the Covid-19 lockdown. We have seen an increasing number of tenants asking their landlords for financial assistance. We have listed below the most commonly asked questions together with our observations and commentary on those questions.
Q Do I still have to pay rent even though my business has been closed since the lockdown?
The short answer is yes. The majority of leases will not have a Force Majeure clause or any other clauses suspending the rent in the event of a pandemic like the Covid-19. The rent due under the lease is, therefore, still payable despite the lockdown. However, please see below about approaching your landlord for assistance.
Q I have heard that landlords are allowing payment deferral. Does that mean my landlord will follow?
Possibly. It is worth speaking to your landlord to see what assistance they can provide. Not all landlords are in the same position and, therefore,the range of assistance (if any) will vary from landlord to landlord. Do not just assume your landlord will allow/agree to a payment deferral, so it is essential to open a dialogue.
Q Can I ask my landlord for a rent-free period?
It is certainly worth asking. The majority of landlords may not (yet) provide a rent-free period. Some landlords have offered this to retain tenants considered as important to the landlord. For example, a hotel that wants to retain a reputable restaurant operator in its premises may be more likely to offer a rent-free period for the duration of the lockdown. Everything will depend on the landlord and tenant relationship and the landlord's business and financial position.
Q Will my lease be forfeited (terminated) if I do not pay my rent?
The Coronavirus Act 2020, which came into force on 25 March 2020, temporarily prohibits any action by the landlord to forfeit the lease until 30 June 2020. So while your lease will not be forfeited immediately, it can be forfeited after 30 June 2020 unless the government extends the protection period. We would not ordinarily recommend relying on the new Act as a financial relief as you will still have to pay the full outstanding rent if you wish to continue the lease after 30 June 2020.
Q Can I terminate my lease?
There two ways you can terminate your lease:
1) Exercise your break option (if you have this in your lease) provided you meet the notice requirements. The main issue is that most break options are for a fixed date and therefore that date may have already passed or is in the future.
2) Negotiate a surrender with your landlord; this will be at the landlord's discretion. Unless there is any incentive or benefit to the landlord in agreeing to surrender the lease, they will most likely reject such requests, especially during these uncertain times.
Q Can I still sell my lease?
Most leases contain a clause that enables the tenant to assign (sell) their lease but usually subject to the landlord's consent. There may also be conditions attached to the landlord's consent. So yes, you can sell if your lease allows. However, the difficulty will be finding a tenant willing to take over your lease in the current market.
Q Do I still have to pay service charges even though the premises are closed?
The other charges payable under a lease such as service charge and insurance rent will most likely still be payable. Similar to the rent question above, if there is no payment suspension clause in the lease then all payments are still applicable. With service charge, there is usually a comprehensive clause in the lease which states that the services must be "fair and reasonable". The question to ask is, therefore, if the building is closed or empty, is it reasonable for the landlord to continue the full services? There may be grounds to challenge service charges depending on the nature of the lease and the type of property. The landlord is usually obliged to provide the services in the interests of proper estate management.
Q My business has suffered significant losses, and I am thinking of closing the business down. What do I need to do about my lease?
Most commercial leases contain a clause that enables the landlord to forfeit or treat the lease as at an end if the tenant becomes bankrupt (in the case of an individual) or insolvent (in the case of a company) or is generally in financial difficulty. Therefore, depending on the wording of the relevant clause, if your business is in genuine financial difficulty, it is likely the landlord can terminate. However, we do not normally recommend this as a way of exiting the lease as it is the landlord's right to terminate, so the tenant has no control over this. Furthermore, your lease will most likely have provisions stating that the landlord can recover (sometimes significant) costs from you for the expenses associated with forfeiture. Also, if your business owns other leases that you would like to keep, then this may not be an option at all. There are also company and insolvency law factors to consider.
If you would like any advice on your business tenancy or would like us to undertake a review and provide you with recommendations, then please do not hesitate to contact our Commercial Property department.
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