Covid 19 - Tenant options under a commercial lease
In a time when we are seeing unprecedented pressure on cashflow for companies large and small, what are a tenant’s options under a lease to release some of this pressure and what roles do landlords play in this process during a nationwide economic crisis.
Whilst no two leases are identical, it is extremely rare to see force majeure clauses in a commercial lease and, as such, irrespective of any external factors (economic uncertainty, Brexit or pandemics) a tenant will generally be contractually liable to continue to pay the annual rent and comply with the terms of the lease come what may.
A tenant may be able to seek a reduction in service charges due, for example, where a landlord is unable to continue to provide the services during the current crisis, however, this is probably the only concession arguably available.
In light of the above, a tenant generally has two options: -
Whilst, as detailed above, a tenant will generally continue to be liable to meet the annual rent and comply with the terms of the lease irrespective, there is nothing stopping a tenant from approaching its landlord to request a concession (be that a fixed reduction for a set period, a deferment of existing or due Payments or a payment plan to allow for outstanding arrears to be spread over a future period). Where a tenant is struggling to meet its payments, this should be its first course of action. From a landlord’s perspective, whilst there is no obligation on them to concede or agree to a concession or similar arrangement, the question a landlord will need to ask themselves is how their stance, if approached on the same, will impact on their future position and rental income achievable generally.
Given the current Covid-19 crisis, it appears highly unlikely that landlords will seek to exercise rights of forfeiture for non-payment of rent as, quite simply, it is unlikely that there will be an alternative tenant waiting to take up a new lease of the premises. Whilst this will obviously be decided on a case by case basis, from speaking with a number of our landlord clients, there does appear to be a willingness to work with tenants (who perhaps have otherwise been reliable and trustworthy) with a view to assisting them through the current crisis in the hope that once the economy stabilises they will continue at the premises with additional goodwill being built up.
Where a rental concession is agreed, we would always recommend this is fully documented in writing to ensure that this does not inadvertently act as a variation of the terms of the lease and to ensure that all parties are fully aware of the agreed terms and any associated payment plans.
Whilst leases are highly unlikely to include a mechanic for a tenant to terminate on economic uncertainty or similar, the majority of leases, especially those granted for a term of ten years or more, will usually include a number of break options where a tenant can terminate the lease early without penalty. Whilst this will obviously vary from lease to lease, it is important that tenants check to see what (if any) break options exist in their lease. Whilst it is more common to see break options set for fixed dates (i.e. after three years, five years, seven years etc) it is also possible for breaks to be structured on a rolling basis (i.e. on not less than [X] months’ notice at any point following a set date). Where a tenant has the option of utilising a break clause, it is imperative that any conditions attaching to the break are fully satisfied and complied with, failing which any purported exercise will be void.
In addition to break options, tenants may have the ability to terminate their lease on relatively short notice where they are “holding over” (i.e. continuing in occupation following expiry of a fixed term lease). Where this applies, a tenant will have the option to bring the lease to an end on serving not less than three months’ notice at any time.
Where a tenant does not benefit from either of the above options, its only avenue with regards to termination is to seek to negotiate a surrender with the landlord, however, in the current climate and given the restrictions currently in place, it appears highly unlikely that landlords will be receptive to this unless, for example, they are perhaps looking at a redevelopment of the premises or the premises forms part of a larger site on which vacant possession is required for one reason or another. Either way, this may be something that the tenant is unaware of and is worth exploring with a landlord should this be seen as the tenants only option.
As a firm, PDT advise a large number of both individual site and portfolio landlord clients and also represent a number of tenant companies large and small. As such, if you are a landlord who may have been approached by a tenant on any of the above, or indeed a tenant who is looking to explore the above options, please contact Craig Burton for more information and to found out how we can assist during these very challenging times.
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