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Commercial Leases: Rental Payments During the Coronavirus Crisis

June 2020 Quarter Day Update

We said at the last quarter day, when the world was first closing down, that it was a critical and perhaps unprecedented quarter day for landlords and tenants of commercial premises alike. Now we arrive at the next quarter day and it seems an even more critical juncture.

Throughout the period we have been working with our landlord and tenant clients alike, stressing the symbiotic nature of the landlord and tenant relationship and that has brought results. Arrangements and accommodations have been made where appropriate. Our clients are generally willing to be sensible. We help to get opposite numbers who are not so sensible, to see sense.

There is no doubt that the landlord and tenant relationship relies on the parties functioning together. The relationship is, at its root, based on two separate business organisms working together to solve a problem. One has space and the other needs space. The latter pays the former to use its space. Problem solved. But every now and again the eco letting system that has developed and refined over the years comes under attack, this time by the coronavirus pandemic. How do the symbiotically connected parties respond?

An Unduly Combative Approach May Not Produce a Clear Winner

Those that look at their partner and understand what their partner needs for the relationship to be maintained are much more likely to survive than those who become predatory or close completely into their shell, whether that is landlords forcing tenants into a corner or tenants simply refusing to pay or discuss options.

The moratorium on forfeiture for non-payment of rent, the ban on the use of statutory demands and winding up petitions in relation to Covid-19 debt and the restriction on Commercial Rent Arrears Recovery (to be used only when initially 3 months of rent was unpaid and now being increased to six months’ worth) are all now to be extended until 30 September 2020, having initially been in place “only” until the end of June. There is a sense that landlords are toothless and some tenants are seeking to take advantage of that and not pay any rent at all.

But that is not a good approach.

In any event, responsible landlords do not generally want their tenants out at the moment, anyway. Who would they get in their place? Why would they want liability for rates? For similar reasons, landlords are not particularly enamoured with the prospect of creating an event of default by kicking off an insolvency process. But that doesn’t mean that tenants can or should take advantage. The chances are that those tenants who try to take advantage will eventually become extinct as the business eco system recovers. Enforcement options might be deferred, but the tenant’s legal obligations including paying rent remain.

A New Code of Practice Might Settle the Storm

The Government has just published a voluntary Code of Practice for commercial property relationships during the COVID-19 Pandemic. It has lofty but worthy aims. The Ministerial Foreword states that the Code “will support businesses to come together to negotiate affordable rental agreements. It builds upon the discussions already taking place by giving those tenants and landlords affected by the crisis the tools to come to a mutually beneficial agreement; ensuring that best practice becomes common practice.”

Three Key Takeaways from the New Code:

  1. 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.”
  2. Consider new arrangements between the parties to a lease, such as amended payment structures or lease variations. Every landlord-tenant relationship is different and arrangements should reflect that. Parties should offer transparency and provide appropriate information about what is going on in their business that justifies concessions or deferrals. The Code also recognises that service and insurance charges are not profit making and need to be paid in full.
  3. Landlords and tenants are encouraged to engage with their lenders and finance providers to seek flexibility in relation to financial arrangements where needed. Lenders and finance providers also have an interest in their borrowers coming out of the other side of the crisis able to continue in business. They also have reputational issues for the long term and are unlikely to accelerate default provisions as things stand. Not least, they have to do better than they did in 2008 in helping borrowers through the meltdown.

Dealing with Recalcitrant Counterparties:

The code is voluntary and some landlords and tenants may choose not to follow it. But that will be difficult, especially for landlords. Of course, if the counterparty won’t come to the table and evolve the symbiotic relationship to suit the moment, there are still things that can be done, by landlords going on the offensive and looking at rent deposits and guarantors and even debt recovery claims and by tenants pushing back with the limitations on landlord remedies at this time. It’s about finding the right pressure points in each case.

We can help landlords and tenants through all of these aspects, whether collecting or making rental payments, or looking for advice on lease variations or items that can be leveraged and in contacting lenders and funders. We can also go on the offensive where appropriate. We have been working effectively with many clients in these ways since before the March quarter date.

Please contact Elliot Lister and Aaron Churney of Asserson’s property litigation team who are available to provide assistance, together with colleagues in the real estate and finance teams.

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