Commercial Property Leasing

The Coronavirus pandemic has exerted considerable pressure on the commercial property sector. Recent figures suggest that non-food retailers have experienced an averaged 70% fall in revenue and around 3 in 10 retailers are now experiencing major liquidity issues, even with furlough, business rates and VAT deferrals and loan scheme support. There is likely to continue to be a prolonged period of uncertainty during which we can anticipate issues arising in relation to the termination of commercial leases.

There are various mechanisms by which commercial leases can be determined. The COVID-19 pandemic has rapidly highlighted the legal issues which arise when a tenant becomes insolvent or seeks to escape their lease prematurely. Property developers and investors, property management companies, freeholders and tenants have been struggling to find the best legal and practical response to disputes and negotiations about break clauses, surrenders and force majeure and frustration; as well as forfeiture, insolvency and disclaimers and the implications for leases, loans and guarantors.

The Coronavirus Act 2020 contained a moratorium on commercial landlords’ forfeiture rights for non-payment of rent. This moratorium has now been extended until and least 31 December 2020 in both England and Wales. This will come as a blow to many landlords who will have been hoping to return as soon as practicable to a period of more stable rental income.

Landlord options include:

• Landlords should communicate with their tenants to establish whether they will experience difficulty in paying their rents and to seek to come to mutually agreeable arrangements where possible.
• If a landlord is forced into considering enforcement action, limited options do remain open to them.
• As the rent still remains due, landlords could charge interest on any unpaid sums at the rate provided for by the lease.
• Landlords could still pursue a debt claim in the County or High Court and seek a money judgment for non-payment of rent.
• Landlords’ inability to exercise Commercial Rent Arrears Recovery (CRAR) was also extended. The minimum periods of unpaid rent required for CRAR to be exercisable are to be increased to 276 days’ rent where the notice of enforcement is given on or before 24 December 2020, and 366 days’ rent where the notice of enforcement is given on or after 25th December 2020.
• CRAR can only be exercised against arrears of principal rent; not service charge, insurance rent, or other charges, even if they are reserved as rent under the lease.

What action should you be taking landlords and tenants be taking?

The government is encouraging landlords and tenants to work together to protect viable businesses, in accordance with the recently published Code of Practice for commercial property relationships during the COVID-19 pandemic. The Code encourages transparency and openness as well as a unified approach in dealings between landlords and tenants. It gives practical examples of various types of concession that the parties to a lease could agree.

The Code also suggests that any newly agreed arrangements should protect tenants against forfeiture (provided the new terms are adhered to) even after the forfeiture moratorium has eventually been lifted.

How can we help?

Now more than ever, specialist legal advice is important to navigate the maze of laws, regulations and procedural rules around landlord and tenant negotiations and disputes. 3PB’s specialist real estate lawyers are experienced in the full range of landlord and tenant matters and remain on hand to assist at this time.

Read a briefing from 3PB real estate lawyers Charles Irvine and Rebecca Farrell on “Changing the locks during lockdown: commercial property and forfeiture“.

3PB’s Gavin Hamilton and Robert Weatherley produced some guidance for business owners and directors in June 2020 on the termination of commercial leases.

The coronavirus pandemic has exerted considerable pressure on the commercial property sector. Recent figures suggest that non-food retailers have experienced an averaged 70% fall in revenue and around 1 in 10 retailers are anticipated to experience liquidity issues.

You can access further information here to learn more about the various mechanisms by which commercial leases might be determined. 3PB focused on the likely scenarios generated by the pandemic and in particular with the legal issues which might arise when a tenant becomes insolvent or seeks to escape their lease prematurely. With a focus on the practical implications of Covid-19, topics covered include break clauses, surrenders, force majeure, frustration, forfeiture, insolvency and disclaimers and the implications for guarantors.