Commercial Rents and Coronavirus

In recognition of the immediate and material disruption to businesses, the government has recently published guidance for businesses in light of the Covid-19 outbreak. 

Included in this is a summary of the financial support available, such as claiming for employees' wages through the Coronavirus Job Retention Scheme, claiming back statutory sick pay due to the virus, deferral of tax payments, business rates relief, grant funding, and support through the Business Interruption Loan Scheme. 

What these measures cannot address however are private arrangements, such as contracts and leases - and the payment obligations which fall within them.

Operators will be acutely aware of their cashflow position as they are no longer able to trade from physical premises, while landlords too will have their own duties towards shareholders, lenders and other third parties.  Many landlords and tenants have been, and continue to be in ongoing discussions over rent payments on properties which have now become unusable and whether these can be deferred, reduced or waived. 

In this context there are a number of key considerations for both landlord and tenant operators looking to manage their position:

1. Will there be any impact on break rights? If a tenant is looking to rely on an ability to terminate the lease early, is this conditional on payment of any rents? Usually it will be conditional on at least payment of the annual rent, whether formally demanded or not.

2. What is realistic? If deferral is an option, are there the cash reserves to be able to afford this in the timeline proposed? Any abatement needed is likely to need to extend over a long period and so it is important to think beyond just the next quarter and evaluate the impact on the viability of the business. Are monthly rents going to help? Will a reduced rent but a longer term reduce the strain? Open and transparent conversations are key here to preserve long-term goals.

3. Before agreeing to any variation in the lease term, it is important to ensure that this does not effect an implied surrender and re-grant of the lease. This can occur if, for example, agreement is reached to defer payment of rent in return for an extra six months being tacked on to the lease. This will have SDLT consequences for a tenant, while a landlord will need to follow any contracting-out procedure all over again.

4. Landlords will need to come to the table with full awareness of what their costs and obligations are. Often it will need to be a tripartite discussion with their mortgagee, who will want at least interest payments to be continued. Keeping any lenders involved in the conversation will save time, and fallout, further down the line.

5. Is there already a cash fund somewhere which the Landlord can use, for example a rent deposit? This often provides for 3 or 6 months' worth of annual rent, sometimes up to 12 months. Drawing on this can provide the landlord with needed cash in the short-term, while also freeing the tenant of having to dip into funds elsewhere to make payment. Landlords may agree that there will be no need to top-up the deposit (at least in the short-term) to reduce further cashflow strain on the tenant.

6. Aside from annual rent, there will be other payments due, such as service charge and insurance rent. Landlords can work with tenants here by powering down buildings and doing only essential maintenance works to keep costs down. It is worth bearing in mind that many insurance policies require that premises are not left vacant.

Finally, for any payment a tenant withholds, it is up to the landlord to recover this debt. With Courts not really functioning at the moment, any recovery will be a long process. Trying to find an appropriate and fair balance must be at the forefront of everyone's minds at a time of such significant impact.

There is a journey still ahead but with consideration, openness and an acknowledgment that everyone will need to share the burden, there can be a better chance of finding our way through.