Emily Seager of property consultancy Knight Frank and Elspeth Moncrieff of law firm Womble Bond Dickinson (UK) LLP offer advice to both commercial landlords and tenants in these testing Covid-19 times.
These are challenging, unprecedented times. The coronavirus epidemic is causing significant uncertainty for UK businesses and organisations. One of the most pressing, and most complex, problems is the relationship between commercial landlords and their tenants. Both are under severe pressure right now and are desperately searching for solutions.
We believe the key theme in this current crisis is collaboration. Just as we, as leading Newcastle property consultants and lawyers, have collaborated for this article, so too must landlords and tenants. Stand-offs, threats and a refusal to compromise will only end-up damaging both parties.
So here goes. This is what we know so far. The government has instructed all non-essential businesses to close for at least three weeks and, in an attempt to mitigate some of these negative effects, a range of measures have been announced to assist businesses – including a 12-month business rates holiday (for qualifying retail, hospitality and leisure businesses), grants and a job retention scheme.
One of the most recent measures announced by the government, as part of the Coronavirus Act, is a temporary suspension of the ability to forfeit commercial leases. So, what is forfeiture? Most commercial leases include a clause which allows a landlord to re-enter premises and bring a lease to an end where the tenant has been in arrears with rent for a certain period (often 21 days), where the tenant has committed other breaches of tenant covenants, or where the tenant has entered into an insolvency process.
Forfeiture can be carried out by peaceable re-entry where the basis of forfeiture is rent arrears and it is the most common practice rather than issuing Court proceedings. This means that the landlord can simply enter the premises and change the locks (provided that no one is at the premises who objects to this) or alternatively they can make application to Court. If the breach is for other than rent arrears than a court application for forfeiture must be made.
The Act prohibits any act of forfeiture by landlords for non-payment of rent until the end of the relevant period which is currently 30 June 2020, and therefore catches the next rent quarter date of 24 June. This date can be extended by the Government.
What does this mean for landlords?
Landlords that otherwise would have been able to exercise their right to forfeit a commercial lease due to non-payment of rent are now prevented from doing so until at least 30 June 2020. Whilst no one knows how long the current situation will continue, we cannot rule out an extension to the relevant period.
Commercial tenants, therefore, have a period of breathing space although it must be remembered that the rent remains due, and the Act introduces only a suspension on the ability to forfeit and does not affect the obligation to pay rent. Tenants should also keep in mind that their leases may be brought to an end by forfeiture for breach of other tenant covenants, which is not prevented by the Act.
The measures will undoubtedly be welcomed by commercial tenants and it is known that many retailers have requested rent holidays or withheld rent payments at the 25 March quarter day including Primark, H&M, Sports Direct and New Look. Metrocentre and Eldon Square owner Intu reportedly received less than one-third of UK quarterly rents it was due on the 25 March.
However, enforcement action can still be taken by landlords for existing rent arrears.
For the time being service of statutory demands are still an option available to a landlord if the tenant withholds rent, and although it may be that legislation will be introduced to change insolvency laws, this is unlikely to protect tenants who have chosen not to pay their rent. Once statutory demands have been served it is then possible to proceed with the lodging of a winding up petition against the company if the rent is still not paid. Although it had been thought that the Courts would be adjourning any winding up applications for public safety reasons, they are now proceeding by Skype so non-paying tenants may still be affected by the possibility of being wound up. There is also the risk of the tenant’s bank account being frozen once a winding up petition is issued and advertised.
An early, collaborative approach between landlords and tenants is highly recommended. Although the measures introduced and the current crisis generally is likely to have a negative effect on landlords’ short-term cash flow and the value of many landlord’s property portfolios, it appears that landlords may be more willing to engage with their tenants, collaborating to find a solution which helps both parties to reach an agreement. One size does not fit all and we are currently spending a good deal of our time creating solutions to a quick-moving business environment.
What does this mean for tenants?
We are likely to see many tenants withholding rent, requesting rent holidays, rent-free periods or a re-structure of how rent is paid. In practice, landlords are likely to be willing to work with their tenants to ensure that the effects of the current economic situation can be minimised and preserve their portfolios for the future, with tailored solutions appropriate for each situation.
In respect of avoiding the threat of a winding-up petition being issued, the options open to tenants are:
• pay the debt;
• reach an agreement with the landlord regarding deferral of the rent payment in view of the government announcing that a landlord’s right of forfeiture will be suspended for three months;
• where the rent debt is disputed in whole or in part, make clear the reasons for the dispute and seek an undertaking that a petition will not be issued or, if an undertaking is not given, consider issuing an injunction restraining the presentation of a winding up petition. In order for this approach to work, any undisputed element of the rent debt will need to be paid (or a good reason for disputing the rent found) or an agreement reached with the landlord to make payment at a later date as above.
Alongside this, we are both seeing a significant increase in the number of lease re-gear negotiations, which include:
· Deletion of break clauses in exchange for rent-free periods.
· Reversionary leases (to compensate the landlord for a short-term rent holiday).
· Rent reviews – settlement of rent review in exchange for a rent-free period or reduced / stepped rent period.
Prior to discussing any lease re-gear, marriage value calculations need to be done to ensure both landlord and tenant share the correct uplift in capital value.
These options should be considered and we recommend a detailed review of the lease, prior to progressing.
Meanwhile, there is help available. All qualifying retail, hospitality and leisure businesses in England will get a 12-month business rates exemption and businesses in England who qualify for Small Business Rates Relief will be eligible for a grant of £10,000.
For retail, hospitality and leisure businesses with a rateable value of between £15,000 and £51,000, you may be eligible for grants of £25,000 per property. Knight Frank’s business rates team are currently working closely with a wide range of businesses affected by Covid-19.
For all businesses affected by Covid-19 who don’t qualify for support under the current government proposals, or for those who have had to reduce operations by consolidating production into only part of the premises, there are a number of measures to consider to mitigate business rates. This includes partial empty rate relief, intermittent occupation or prohibited from occupation rates relief. There is also an opportunity for all occupiers to submit ‘checks’ for the detrimental impact of Covid-19. It is important to note that the timing of the ‘check’ cannot be retrospective so we would recommend getting in touch now so cases can be prepared.
We hope this article has been helpful to both landlords and tenants. Collaboration must become the first and crucial priority for both parties, if they are to negotiate these dangerous and unchartered waters safely.
