Covid-19: Managing Commercial Leases

LawBite's Philippa Cobb explores the impact of lockdown on commercial leases, including government's temporary legal protection for commercial tenants

By Philippa Cobb

After the initial seismic shock of the Covid-19 outbreak and ensuing lockdown, the commercial property world is having to adapt quickly to deal with the challenges being faced by both landlords and their tenants, and the impact the pandemic is having on the general operation and management of commercial leases.

Whilst the government is allowing the cautious reopening of most commercial premises, the restrictions imposed mean that for some businesses, revenue is severely diminished or has disappeared altogether. Inevitably, this will result in an increase in the occurrence of unpaid rent and even with the potential of being offered some form of rent concession, it's certainly going to be a battle for some commercial tenants to survive.

For others, the pandemic is offering an opportunity to reset some aspects of the landlord and tenant relationship. For some tenants, whose businesses are doing well in the current situation, this may present an opportunity to renegotiate the terms of an existing commercial lease. Alternatively, a prospective tenant may be empowered in their negotiations for a new lease, and gain some leverage to negotiate a break clause or a cap on service charges, for example.

The government has stepped in to shore up the British economy in many ways. The commercial property world has been a key area for protective measures. Here's how:

Temporary legal protection for commercial tenants

The Coronavirus Act 2020, which was passed swiftly through Parliament at the start of lockdown, brought in essential measures to protect a commercial tenant from the overnight shutdown of their business. Measures included:

Suspension of a landlord's right to forfeit a commercial lease for non-payment of rent until 30 September 2020.
Commercial Rent Arrears Recovery (the right for the landlord to seize tenant's goods for monies owing) not being available, unless there is more than two quarters' rent outstanding under the lease for the period to 30 September 2020.

The Corporate Insolvency and Governance Act came into effect on 25 June 2020. It aims to safeguard against aggressive rent collection tactics. Measures include:

Statutory demands (which have historically been used as a quick and relatively inexpensive method for landlords seeking to enforce non-payment of rent due under a lease) issued between 1 March 2020 and 30 September 2020 cannot form the basis of a winding-up petition presented at any point after 27 April 2020, which means, in effect, that they are void.
Winding-up petitions cannot successfully be presented between 27 April 2020 and 30 September 2020 where Covid-19 has had a financial effect on the debtor company.

There are currently no restrictions on a Landlord's ability to enforce a guarantee or draw on a rent deposit.

Expectations on landlords and tenants

The government has made it clear that it's in everyone's interests to work together to survive and this has been enshrined in their Code of Practice for Commercial Property Relationships during the COVID-19 Pandemic (19 June 2020). Whilst this is not legally binding, it's endorsed by a number of leading organisations and representative bodies within the sector, including the British Chamber of Commerce, the British Property Federation and the British Retail Consortium. The Code is a clear indication that commercial landlords and their tenants are expected to behave collaboratively to shore up the commercial property sector. Key points include:

A landlord should be prepared to make concessions relating to rent payments due under a commercial lease where they can, and to provide clear reasoning for the refusal of such concessions.
Tenants who are in a position to pay their rent in full should do so.
Both the landlord and tenant are called upon to act reasonably and work together collaboratively, even if there are rent arrears, including using some or all of a rent deposit.
Where there is a service charge, it should be reduced where lack of use of a property during the lockdown period has lowered the costs incurred by the landlord and any reduction in service charge is to be passed on to tenants as soon as possible.
Equally, additional service charge costs may be incurred in complying with Covid-19 health and safety requirements.
The Code is to apply until 24 June 2021.

Looking ahead

The government's measures focus primarily on providing breathing space for commercial tenants. The government has made clear that the legally binding nature of the commercial lease contract still stands, and the tenant's covenants and payment obligations remain - it's just the landlord's rights of enforcement against the tenant that have been temporarily suspended.

Whilst this may be the strict legal position, the commercial reality is that for every struggling commercial tenant, there is a commercial landlord not receiving rent payments and potentially facing the unwelcome prospect of vacant premises. As a result, many landlords are unlikely to want to lose their tenants at the current time and so will hold off taking enforcement action. For instance, a rent holiday may prove a better option for a landlord, than commencing court proceedings to recover rent, which in all likelihood, the tenant will be unable to pay in any event. Further, one has to hope that, having taken on board the government's new Code, and in an effort to keep their premises occupied, a landlord will look favourably on their tenants' requests for a rent concession, such as a rent suspension. Only time will tell.

NB: Any agreements made between landlord and tenant on a lease, no matter how temporary, need to be properly documented and prior legal advice sought for your specific circumstances.

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About the Author

Philippa Cobb is a LawBrief at LawBite, the UK’s leading online legal portal powering a fully SRA regulated and insured UK law firm that specializes in commercial law for business. Having studied Law at the University of Birmingham, she has been practising as a solicitor specialising in commercial property for over 20 years. She advises a broad range of clients on a variety of commercial property issues, including all aspects of leasehold property and the landlord and tenant relationship, estates and portfolio management, and title issues.