In the wake of the coronavirus pandemic the mass closure of shops, pubs, leisure centres and offices has resulted in much uncertainty over the position of landlords and tenants of commercial premises. Tenants are concerned with how they are going to pay their rent and landlords have to grapple with reduced or even nil income.
Almost all standard commercial leases contain an obligation on the tenant to comply with statutes and notices or orders made by the authorities. As a result, a tenant will not be in breach of their lease if they comply with the directions given by the UK government, such as requiring closure of offices and arranging for staff to work from home to limit the spread of coronavirus.
Some general commercial contracts contain a “force majeure” clause allowing the parties to end or suspend the performance of their contractual obligations when certain circumstances beyond their control arise and which make performance inadvisable, commercially impracticable or illegal. Sometimes the concept of “frustration” can be used to excuse one party’s compliance with contract obligations.
However it is very rare for property leases to include such a force majeure clause and it is most unlikely that a tenant can use frustration as an argument, so a tenant is not entitled to withhold rent regardless of the exceptional Covid circumstances. To withhold rent would open the tenant up to the risk that the landlord could forfeit the lease and take possession of the property without court action by simply changing the locks. The government has however acted to review this and has issued guidance to enable tenants to continue trading at this difficult time.
The government has passed the Coronavirus Act 2020, which became law on 25 March and amongst other provisions, this has suspended the landlord’s ability to take forfeiture action for business tenancies against a tenant who cannot pay their rent. These measures are now in place and no business can therefore be forced to leave their premises if they miss a rent payment within the period up to the end of June. The provisions are likely to be reviewed and could be extended.
The government will need to monitor the impact this is having on commercial landlords as an ongoing suspension of rent to help commercial tenants will of course have an effect on the landlord’s own cash flow resulting in hardship on that side too.
If a tenant is able to pay their rent or at least part of it, they are encouraged to approach their landlord to propose a form of rent concession. Tenants may be able to agree a reduction in their rent taking into account the current situation. However, whilst there are commercial pressures on landlords to agree this, so as to allow their tenant to continue in business and prevent a void period, there is no legal obligation on the landlord to do so.
The tenant could for instance agree with the landlord that they pay their rent monthly or at a reduced rate for a period of months or agree a rent suspension for a period. If a landlord is willing to agree to this, the terms of the arrangement should be evidenced by a formal side letter which should clearly set out the terms which have been agreed and this should signed by both parties.
We are advising both landlords and tenants on these issues and if you require any assistance at this time, please contact the commercial property team at Clifton Ingram on 0808 164 1510 or by completing our online contact form.