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: 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.