Coronavirus and Commercial Leases

As the UK continues to struggle with the effects of coronavirus, many landlords and tenants are worried about the impact the pandemic is having on their property arrangements.

Rental PaymentsDue to the mandatory closure of various business, in line with Government guidelines, many tenants are understandably suffering adverse financial implications. The most common question we get asked by our clients is whether tenants can cease paying their rent?

• Most modern leases will contain a clause stating that rent is payable ‘without deduction or set off’. This would prohibit the tenant from withholding rent due to coronavirus related reasons unless an express agreement is reached with the landlord.
• Many leases will contain a break clause which may allow the tenant to bring their lease to an end early by providing the landlord with the requisite amount of notice required. It is essential that a break notice is properly exercised, and a tenant should seek legal advice before serving notice.
• Where the lease does not contain a break clause, but the tenant is unable to continue paying any rent, the tenant may wish to approach the landlord to negotiate a surrender of their lease.
• With certain leasehold properties, such as pubs or business’ operating under a franchise, the rent payable may be linked to the income generated at the property (turnover rental clauses). This may allow the tenant to reduce the rent payable whilst the business in unable to operate at full capacity.
• Whilst it is rare with commercial leases, some leases may contain a ‘force majeure’ clause which allows the lease to be brought to an end. This is a clause which releases all parties to the lease from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs.

The best route for landlords and tenants is to open an honest dialogue with the other party regarding rental payments with a view to reaching a mutual agreement, where possible. If an agreement is reached between the landlord and tenant to provide a rent free period or a reduced rent for a set period of time, this should be properly recorded in writing so as to provide certainty for both parties and avoid later disputes as to rent arrears.

Insurance – can it help cover rental paymentsLandlord and tenants should check the terms of their existing policies to see whether ‘business interruption’ is included. If this cover is provided and your business has been required to close to comply with Government guidelines you should consider speaking with your insurer or insurance broker to see whether a claim can be made.

Can the Landlord forfeit the Lease?

The Coronavirus Act 2020, which came into effect on the 26^th March, places various restrictions on the rights usually available to a landlord under a commercial lease with a view to protecting tenant’s interests. These include:

• A moratorium on the forfeiture of commercial leases on the basis of non-payment of rent. By definition, ‘rent’ includes all sums payable under the lease. This would include service charge, insurance rent, utilities costs etc.
• Rent and all other sums due by the tenant are still owed to the liable and liable to recovery once the moratorium has ended.
• The Coronavirus Act 2020 does not apply to short leases of six months or less. Short leases are still capable of being forfeited.
• Where a tenant has served notice on the landlord for a new lease under the Landlord and Tenant Act 1954, the landlord is unable to reject on the ground of unpaid rent whilst the moratorium is in place.

These restrictions are to remain in place until 31^st December 2020 (at the time of writing) and so landlord’s will be unable to take action to recover arrears or forfeit the lease until the start of 2021.

Court backlogged

The Coronavirus Act 2020, which came into effect on the 26^th March, places various restrictions on the rights usually available to a landlord under a commercial lease with a view to protecting tenant’s interests. These include:

• A moratorium on the forfeiture of commercial leases on the basis of non-payment of rent. By definition, ‘rent’ includes all sums payable under the lease. This would include service charge, insurance rent, utilities costs etc.
• Rent and all other sums due by the tenant are still owed to the liable and liable to recovery once the moratorium has ended.
• The Coronavirus Act 2020 does not apply to short leases of six months or less. Short leases are still capable of being forfeited.
• Where a tenant has served notice on the landlord for a new lease under the Landlord and Tenant Act 1954, the landlord is unable to reject on the ground of unpaid rent whilst the moratorium is in place.

These restrictions are to remain in place until 31^st December 2020 (at the time of writing) and so landlord’s will be unable to take action to recover arrears or forfeit the lease until the start of 2021.

More information

If you would like to discuss your commercial leasehold property please contact a member of our Commercial Property Team who will be happy to assist.

This article was written by Gemma Ball, Solicitor in the Commercial Property Litigation at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of October 2020.