Coronavirus (COVID-19) FAQs for commercial property landlords and tenants
Welcome to Rix & Kay’s dedicated commercial property FAQ service to help commercial landlords and tenants deal with the many challenges presented by the ongoing Covid-19 pandemic.
If you’d prefer to discuss your question in detail then you can contact a member of our team or email panel members Jo Bryan e. email@example.com or Stewart Gregory e. firstname.lastname@example.org
Q: I am a sub tenant, my landlord is in financial trouble and has indicated that the company is likely to go into liquidation. What is my position?
If your landlord goes into liquidation the liquidator could try and sell the landlord’s business as a going concern and your position may not change if the lease is assigned to the buyer who becomes your landlord. What is more likely is that the liquidator will disclaim the head lease. If this is the case, you still have a valid lease and can remain in possession of the property. The superior landlord will become your landlord and you will pay your rent direct to him.
However, the superior landlord does have the ability on liquidation of your landlord (on the assumption that the lease does provide for the landlord to have the ability to terminate the lease on every aspect of insolvency) to forfeit the head lease. In this situation, if the head lease is forfeited then your sublease will automatically be forfeited, but you will have the right to make a claim to the court for relief against forfeiture of your lease. Should you wish to remain in the property you will become liable to pay the rent as set out in the head lease and to comply with the head lease terms. Again, the superio landlord will become your direct landlord.
Q: I am due to renew my lease in the autumn. I rent two floors under one lease. Going forward, I only need one floor. Can I bring my occupation of one floor to an end whilst continuing to occupy the other floor?
If you are renewing your lease under the statutory provisions of the Landlord and Tenant Act 1954 Act then the starting point is that the new lease must be on the same terms as the existing lease. This would include the demise (which is the extent of the property you are letting). Which means that you cannot renew the lease for one floor and not the other. That said, in practice, you might be able to negotiate with your landlord to see if they will allow you to take a new lease of one floor (and terminate the double floor lease). That though would be at the landlord’s discretion.
If your lease is being renewed by negotiation (rather than through the statutory provisions) then it is open to you to agree whatever bargain you can with your landlord.
Another alternative is that you could ask the landlord to allow subletting of part in your renewal lease (if that is not already available in your current lease). This would mean that if you were able to find a third party to take occupation of one floor you could occupy one floor yourself and under let the floor you don’t need. You should be aware that you will be ultimately liable for any breaches by the subtenant.
Ultimately, the success of achieving whatever option you decide is best for your business will depend on the relative bargaining powers of both you and your landlord.
Q: As a landlord my service costs have actually increased due to the need to deep clean the offices. Can I recoup these additional costs?
It depends upon the wording of the service charge provisions in the lease.
If you employ a managing agent they would be able to advise on the operation of the service charge provisions. Alternatively, specialist guidance can be obtained from a suitably qualified surveyor as to what can be recovered under the specific provisions in your lease.
There is a RICS professional statement dealing with service charges: “Service Charges in Commercial Property Code (2019)”. This sets the standards of management required in commercial property. It contains the mandatory obligations with which RICS members and regulated firms engaged in this area must comply. The RICS has also published an advice note for dealing with service charges during the Covid-19 pandemic.
The note confirms that “Wherever appropriate, costs should be limited to the provision of works and services required to keep properties safe and secure and at a level to comply with health and safety concerns.”. The note also reiterates the point that its guidance is there to help but does not add to or detract from the Code requirements.
The overriding obligation is that “costs should be limited so far as is reasonably practicable”. That is not to say that unusual, novel and additional costs at the current time (such as deep cleaning of offices to comply with health and safety requirements) are not recoverable, but that they should be limited to what is reasonable. Similarly though, if other costs have been reduced, perhaps as a result of lower occupancy rates, then those reductions should also be immediately reflected in the service charge budget estimates and the tenant contributions adjusted accordingly.
Service charges are typically budgeted a year in advance and paid quarterly in advance. Most leases then contain a mechanism for reconciling any actual increased/reduced costs at the end of each service charge year. The RICS advice note suggests that: “It is not considered necessary to reissue budget documents to tenants but there should be clear communication with occupiers as to the action being taken to reduce costs and to ensure tenant payments do not exceed the revised estimate of anticipated expenditure.
Landlords and managing agents should also give sympathetic consideration to agreeing to adjust the frequency of on-account payments to ease cash-flow for all occupiers.
Where such arrangements are put in place, tenants should acknowledge that this will also be a difficult time for landlords in maintaining their own cash flow and should continue to ensure prompt payment of service charge demands.”
Q: I’m a landlord and I know my tenants are well-capitalised and have a strong cash position but they are refusing to pay. I’m concerned they are exploiting the current situation. Is there anything I can do?
Key to this is an honest and open conversation. The current climate has created an impasse between landlords and tenants. It is well known that many tenants are hiding behind the moratorium on forfeiture and other actions for non-payment of rent. Even tenants in receipt of Government grants and loans are not paying anything on to landlords.
If your tenant has a strong cash position then why will they not pay their rents as contractually required? There needs to be a sensible and realistic approach from both parties. Last month the Government issued a Code of Practice whose aim was to encourage landlords and tenants to work together to come to agreements on rent that work for both parties. It is in no party’s interest to adopt an intransigent position – both need to recognise the other’s position and “share the pain” to get through this.
The Code’s position is that “Government has always been clear that tenants who are able to pay their rent in full should continue to do so, whilst those businesses that cannot pay in full should communicate with their landlord and pay what they can. Landlords should also provide support to businesses if they too are able to do so.”
The hope is that the best practice promoted by the Code will become common practice. However, the Code is not mandatory.
With that in mind if your tenant is cash rich and well capitalised, there seems no reason why it should not be paying what it can. That is what the Code requires. Your conversation may though identify underlying concerns not otherwise apparent. Might a small, temporary concession, such as changing rent payment terms from quarterly to monthly in advance be enough to ease a cash-flow issue whilst still allowing you to receive rental income? Or might you be able to offer a short rent-free period in return for something, such as their agreement on new rent under an upcoming rent review, or their agreement to extend or renew their lease?
Alternatively, has the tenant given you a rent deposit from which you could withdraw any outstanding rent? Be careful to look at the wording of your rent deposit deed, which governs how the rent deposit is to be held, to ensure you do not breach the terms within it by removing the money without giving the requisite notice. Often your rent deposit deed will require you to give a certain number of days’ notice before you remove the funds. The tenant will then have a certain amount of time under the rent deposit deed to top the funds back up again.
Q: My lease has expired and I don’t know whether I want to stay in these premises. What are my options?
Firstly, it will depend on whether or not your lease has the protection of the Landlord & Tenant Act 1954. If it does, then to bring the lease to an end, you can do so by giving at least 3 months’ written notice to your landlord. Your situation therefore gives you quite a bit of flexibility.
If you are paying a market rent, you may not want to make any approach to your landlord until such time as you have made a decision. If you decide that you do want to stay, then you should make a proposal to your landlord with regard to the new terms. If your landlord does not engage with you, you should consider serving a formal notice on your landlord requesting a new tenancy under section 26 of the Landlord & Tenant Act 1954.
If the rent that you are currently paying is above the market rent, it may be in your interest to serve a section 26 notice sooner rather than later, with a view to acquiring a new lease on more favourable terms.
If your lease does not have the protection of the 1954 Act, it means that after the end of the contractual term you will be regarded as a trespasser and liable to pay damages for your ongoing occupation, equivalent to the current market rent. The landlord could take court action to evict you, but it will take him some time to go through this process should he not want to negotiate new terms for you to remain. Your landlord may suggest that you enter into a tenancy at will whilst negotiations for the new lease are ongoing. A tenancy at will can be terminated by either party in an instant and does not therefore carry with it any security of tenure. If you choose not to negotiate a new lease, it is highly likely that, subject to the terms of your lease, your landlord will also make a claim for dilapidations in addition to the damages claim.
A final scenario to consider is, if you have remained in occupation after the end of the contractual term, even if your lease did not have 1954 Act protection, you may have now acquired a statutory periodic tenancy. In that case the tenancy would be protected by the 1954 Act and the landlord would not be able to oppose the grant of a new lease to you unless he had certain limited statutory grounds. Again, your situation would therefore give you quite a bit of flexibility.
You will see that everything depends upon the individual circumstances and lease terms.
Q: My rent should have been reviewed last month but all I have received is a rent demand from my landlord for the same amount as the previous demands. Should I do anything?
It will depend upon the terms of your lease and what rent you are paying currently compared to the market rent.
Many leases provide for “upwards only” rent reviews. This means that rent will only go up on the rent review date, or stay the same as the rent currently being paid. Whether the rent should go up will depend upon what the market rent is on the rent review date. If the landlord considers that you are already paying a market rent then there is little incentive for him to invoke the rent review.
It is unusual for there to be provisions in the lease that only give the landlord a window of opportunity to increase the rent to market rent within a certain period after the rent review date before the rent is then deemed to remain as before. He does not usually therefore need to invoke the rent review immediately when the review date is reached. Equally, it is unusual for there to be provisions deeming a new rent proposed by the landlord to have been accepted by the tenant if he does not object within a certain time. However, leases should be checked to ensure these provisions are not included.
Some leases (albeit rare) provide for an upwards or downwards rent review. If that is the case and you believe that the market rent is less than the amount that you are currently paying, then you should instigate negotiations with your landlord to pay the lower rent. If agreement cannot be reached it is likely that the lease provisions will set out the steps to be taken to resolve the dispute.
Even if the rent review may lead to an increase in the rent payable, it may still be in your interests to try to get the review concluded. Most leases will require interest to be paid on any shortfall in the rent paid from the review date to the date the new rent is finally determined. This could be a significant payment if the review is not concluded for some time after the review date.
Finally, even if there is no change in the rent it is still worth documenting this nil increase and getting agreement with your landlord. If this is not done it could leave some doubt as to whether or not the rent has been reviewed and could delay a future assignment of the lease. Some leases will require a rent review memorandum to be entered into by the parties to formalise the agreement.
Q: If I have paid my landlord monthly rather than quarterly, can they take from my rent deposit?
In theory, if your lease states that rent payments are to be paid quarterly in advance and you decide to pay monthly without agreeing this with your landlord first, you are in breach of these provisions of your lease. Although you might argue that you have clearly made a partial payment, rather than no payment at all, your landlord could still argue that there has not been full compliance because of non-payment of the balance. As a result the landlord could decide, subject to providing you with any notice required under the terms of your rent deposit deed, to take the outstanding balance from your rent deposit. In most cases you will need to top up the rent deposit back to the original amount following the withdrawal. How long you will have to make this ‘top-up’ will be governed by the rent deposit deed. You will see that this is a fairly counterproductive activity for both parties and to avoid this we would recommend agreeing the change and documenting it in a rent concession side letter.
Q: I am a landlord and due to undertake a rent review soon. Can I wait and do it once the market has settled down so I can maximise the rental value of the property?
Rent reviews are strictly governed by the terms of the rent review clause within your lease. We are assuming here that the review clause is a usual form upwards-only “market rent” review. Such clauses provide defined Review Dates. Whatever calendar date is attached to the Review Date it is set in stone and it is at this date that the rent must be reviewed and a new rent determined. So, you can see that it is not possible to select a different point in time to review the rent.
Even if you were to delay implementation of the review, the surveyor undertaking it would still be required to determine the rent payable at the Review Date. The terms of modern rent reviews will usually allow rent to be agreed in advance of a review date and for expert determination if it can’t be agreed within a certain time after the Review Date. In all cases though the rent that is being agreed or determined is the rent payable at the Review Date.
In order to determine the open market rent it will be necessary to get a surveyor to make a rent assessment. This will involve a site visit and review of the lease. The new rent, once agreed or determined, will then be owed from the Rent Review date (with interest if it is determined after the Review Date). A note of caution here: some leases state that “time is of the essence” for rent reviews, if this is the case with your lease you must comply with whatever time limits are set or risk being barred from implementing any rent review.
It is also important to note that although ‘market rent’ reviews are common, there are other types available, such as ‘turnover rent’, ‘open market’ and ‘index-linked’ (or RPI reviews). It is vital to get advice on the specific type of rent review contained within your lease.
Q: We have not paid rent since the March quarter day for some of our smaller shops where we wish to exit the lease. Once we are in July, does the landlord have to look to forfeiture as a first remedy for the non-payment of rent, or can the landlord elect to chase the rent arrears while leaving the tenant in place and not forfeit the lease?
Firstly, it is important to say that forfeiture is not an automatic right and is only available where it is expressly written into a lease. Having said that, most commercial leases will contain such a clause. Secondly, a landlord does not have to look to forfeiture as a first remedy. This is just one of a range of remedies that are available to landlords along with an action in debt, statutory demand, pursuing any guarantor, withdrawal from a rent deposit and use of Commercial Rent Arrears Recovery (CRAR). A landlord will consider what the benefits are of forfeiting the lease versus the other remedies that are available to him. Forfeiture does allow the landlord to obtain possession so that the property can be re-let. However, it does risk him being left with an empty property and rates liability. Landlords can also inadvertently waive their right to forfeit by accepting rent after the date on which the right to forfeit arose, and in some instances by sending out rent demands after a breach. In the current circumstances landlords may prefer to issue proceedings for the debt owed, leaving the tenant in place racking up additional rent debt whilst in-situ, plus any interest owed on the sum under the lease.
Q: What impact does a lease forfeiture have on a tenant? Does this have any impact on credit ratings for example?
Forfeiture can take effect in two ways: by re-entry (where the landlord goes in and changes the locks) or by court order (where the landlord applies to the court for possession). The former is unlikely to be picked up by a credit agency but the latter may do if the credit agency collects data on possession hearings at Court.
The biggest impact on the tenant may therefore be reputational. Should a tenant who has had a previous lease forfeited wish to let another commercial premises in the same area, they may find that commercial property agents and future landlords may not be happy to let to them. Landlords will often want to see references for potential tenants and any forfeiture action will have a very negative impact on such references.
You should also consider that any obligation on the tenant to yield up the property in good repair prior to the date of forfeiture will be unaffected by the forfeiture. The landlord will still be entitled to damages for non-performance of any repairs and any other lease obligations.
Q: If I have not paid my rent can I still exercise the break clause?
The first thing you need to do is to look at the conditions attached to the break clause in your lease. It is usually a precondition to the exercise of a break right that the rent has been paid in full to the date of both the service of a break notice and the termination of the lease on the break date. Being in rent arrears will therefore usually prevent you from exercising a break right.
All other conditions of a break clause will also need to be complied with if a break is to be exercised. These will often require you to give vacant possession and not to be in breach of other lease terms. To give vacant possession you will need to have removed all your property (chattels) from the premises, and compliance with lease terms will usually mean that the property must be left in good repair. You may wish to speak to your landlord to see if arrangements can be made to make a financial contribution in lieu of repairs. However, the landlord is likely to want to instruct a surveyor to inspect the property and quantify the repairs required. The current restrictions may make this difficult if the property is still occupied.
If all preconditions to the exercise of the break right cannot be complied with at the current time, then you may indeed lose the break opportunity. Whilst negotiations with the landlord may be successful over some aspects of the difficulties faced in the current circumstances, waiver of a precondition to a break right is not likely to be something a landlord will agree to.
Q: I am a tenant and my premises are currently empty, are there any special measures I should be taking?
You will almost certainly be under an obligation to notify your insurers that there is no one present at the property otherwise your cover could be jeopardised. Some insurers have waived their requirements to notify, or extended the period of time the premises must be unoccupied before you must notify them. Others have asked tenants to install physical measures to maintain cover such as installing bars and/or CCTV, sealing letterboxes, draining down heating systems, and, for larger industrial sites, installing blockades to prevent vehicular access. We would recommend checking with your individual insurer.
As well as complying with your insurance policy you should also be aware that your business premises may be your registered address at Companies House and HM Land Registry. This will mean that it will also be the address used for the service of notices. Service of a notice either by post or by hand to a registered address is often considered valid service. You could therefore miss out on replying to notices in respect of the property, your company or court proceedings. It will not be a defence to state that you did not visit the premises to collect your post unless it is physically impossible to get to it. We would therefore recommend that you make arrangements for the post to be collected regularly or alternatively consider nominating a substitute address.
You should also check the terms of your lease. Many leases in the retail sector may contain “keep-open” clauses requiring the tenant to keep the premises open for trading for a minimum period or number of hours per week. It is uncertain whether tenants closing premises to comply with a government order could be held in breach of a keep-open clause. A tenant failing to comply with a government order would certainly be in breach of its covenant to comply with all statute. A tenant could raise a strong defence to an allegation of breach by reference to the closure order, but this is uncharted water. There are also arguments as to whether the lease may have been frustrated as a result of the closure order. Courts have been reluctant to find frustration in a lot of lease cases and certainly the length of the closure and the remaining lease term would be important considerations. In the circumstances, the best policy has to be to try to have a constructive dialogue with the landlord.
Finally, it is worth pointing out that the government is also currently considering a proposal for further relief for landlords and tenants that has been put forward by the British Property Foundation and the British Retail Consortium. This is being referred to as the Furloughed Space Grant Scheme and involves the government in paying a proportion of the fixed property costs of businesses affected by the pandemic (determined on a tapered basis depending upon the proportion of revenue lost by the tenant). A similar scheme has already been introduced in Denmark. The proposal is currently limited to businesses in the retail, hospitality and leisure industries (although there is pressure to widen it) and the government is not expected to conclude its consideration of the proposal until next month.
Q: I want to make a claim to my insurer for ‘Business Interruption’. I’ve read the well-publicised story and group action against Hiscox. Is this a viable option for me?
The answer is maybe, but the devil is in the detail of your insurance policy wording. There are many businesses which have found themselves with no income as a result of the pandemic and have quite rightly therefore turned to their business interruption policies. However, whether or not a claim can be made against insurers is down to the specific wording within the insurance policy, as policy wording varies widely. Often, cover for business interruption due to denial of access to property, as a result of government regulation, pandemic or communicable disease, is excluded from policies and must be purchased as extended cover. Even where the policy appears to provide cover, many are finding insurers rejecting claims on the ground that the cover is only for property damage. Hiscox is one of a number of insurers finding themselves under attack for refusing to pay out on claims that would appear, on the face of the policy, to be covered. The financial regulator, the FCA, is turning to the courts to resolve disputes between businesses and their insurers. It plans to “bring relevant cases to court as soon as possible for an authoritative declaratory judgment regarding the meaning and effect of some [business interruption] insurance policy wordings”. However, some fear that this action may do more harm than good as it may delay payments by insurers awaiting the court ruling. On the other hand, it is clear that the complexities of policy wording do create uncertainty, and the issue does therefore need to be resolved given the severity of the potential consequences for customers.
Whilst it does not assist in business interruption cases, some businesses may find some relief in other guidance issued to insurers by the FCA. This is designed to put pressure on insurers to offer refunds to customers who are no longer getting any benefit from their policy as a result of the lockdown. That could include things like policies insuring against risks that could no longer happen, such as public liability cover where premises are closed.
Q: I run a restaurant. Should my landlord be making a claim against his own insurer under the “loss of rent provisions” before demanding rent owed during the lockdown period?
It is unlikely that your landlord will have a policy that allows for claims for loss of rent due to the pandemic. However, it would certainly be worth talking to your landlord to ask that they check their policy to see if they are able to make any claim. It is unlikely that the lease will impose on any obligation on them to make any claim though.
Q: My tenant has asked me for a rent-free period, am I obliged to give them one?
No. However, if your tenant is unable to pay their rent then, until after 30 June 2020 (which the Government could extend) you will be unable to forfeit the lease or re-enter the premises for non-payment of rent. Please be aware that “rent” also includes other payments such as unpaid insurance rent and service charges.
Furthermore, you will also not be able to use the other remedies for recovery of rent normally available to landlords: Commercial Rent Arrears Recovery (CRAR) (unless you are owed in excess of 90 days’ rent), Statutory Demands, issuing debt recovery proceedings and taking action against the guarantors.
However, the rent arrears (and interest on them) will continue to accrue and will become payable after 30 June 2020 (or later if this period is extended) when forfeiture and the other remedies will be available again. If you are minded to offer a rent-free period (or other concession) then you may want to encourage your tenant to ensure they have accessed all assistance/relief provided by the Government before granting it.
Q: I want to help my tenant but the rent I receive is my only source of income – what options can I present to the tenant that will allow me to also protect my own income.
There are several options that are available. The aim is to help the tenant trade through the current crisis whilst still maximising your own income. What is an appropriate form of assistance will therefore vary on a case-by-case basis and it may be a combination of options that best suits the particular circumstances.
Options for assistance include, for example, a rent reduction, rent free period, rent payment deferral to a later date or service charge reduction. Consideration should also be given to how or when any reduced or deferred rent is to be recovered after the crisis is over (e.g. by adding the deferred rent to future rent payments or to add the deferred period to the term of the lease).
You could also look at changing the way in which the rent is paid, perhaps from a quarterly payment to a monthly payment, or from advance payment to rent in arrears, to allow the tenant to manage their cash flow. In all this it is also important to recognise that any rent concessions must be considered in the context of other provisions in the lease e.g. the length of the term remaining, any rent reviews, any break dates etc.
There are many individual arrangements being agreed between landlords and tenants, but whatever is agreed it is important that it is properly recorded in a side letter.
Q: I never renewed my lease when the term expired but I have been paying rent and have remained in occupation. I have now decided that I want to terminate my lease because I have had to close due to COVID-19 and I am worried that I cannot pay the rent in the future.
How you must terminate your lease will depend on the wording of your lease and, in particular, whether or not your lease is “contracted out of” or “protected” by the security of tenure provisions in the Landlord and Tenant Act 1954. These provisions and the notice periods required by them are quite complex to operate.
We can advise you on the amount of notice you must give to your landlord and the form your notice must take. You will also need advice on terminal dilapidations and how to return the property to the landlord in compliance with your lease. You cannot now end your tenancy by simply giving up possession of the property, and if the correct procedure is not followed then there is a risk that your obligations under the lease will continue.
Q: I am due to renew my lease: how will coronavirus affect this process?
We would always advise that you talk to your landlord as there needs to be agreement on what you and they want to achieve. The renewal process will be largely down to the terms of your existing lease and, in particular (as with question 4 above), whether or not your lease is “contracted out of” or “protected” by the security of tenure provisions in the Landlord and Tenant Act 1954. We can advise you on the procedure that would need to be adopted. The biggest affect the current pandemic is likely to have on the lease renewal process may be delays in agreeing the new lease terms due to the ability of surveyors to make inspections of the property for the purposes of valuing the new annual rent and establishing its condition. Provisions in the new lease may have to be adapted to deal with this. We are also aware of landlords proposing lease amendments to deal more generally with the issues that may arise from similar pandemics in the future.
The information above is intended to be for guidance only. All leases are worded in different ways so it is important that you seek specialist legal advice on your own specific lease to ensure you are able to utilise any and all options that are available to you at this current time. We would always recommend that any variation to the current terms of the lease are properly documented to protect both parties.
The information above is intended for guidance only. All leases and insurance policies are worded in different ways and all cases depend upon their individual facts. It is therefore important that you seek specialist legal advice on your own specific circumstances to ensure you are able to utilise any and all options that are available to you at this current time. We would always recommend that any variation to the current terms of a lease are properly documented to protect both parties.