We are in uncharted territory at the moment, but the advice to landlords and tenants alike must be to try and be as prepared as possible for further disruption by checking the terms of leases, lease agreements and any insurance policies, and speaking with their landlord or tenants to understand what business continuity plans are in place, and to try and anticipate whether the other might seek to re-negotiate, terminate or suspend existing leases/agreements.
Rent Payment – increasing numbers of tenants will want to keep cash in their business, and are likely to want to discuss and agree rental holidays or concessions. It is important that any such agreements are properly documented, setting our clearly what has been agreed, whether and when any shortfall of rent will be paid, if at all, and making it clear that the arrangement in no way permanently alters the terms of the lease.
A tenant who is in financial difficulties undoubtedly benefits from paying a reduced rent. From the landlord’s perspective, although such a request is not welcome, it may well be that the Landlord will agree to the Tenant’s request because it is in the Landlord’s better medium to long term interest to do so. Insisting on payment of the rent in full may simply drive the Tenant into insolvency, which will mean loss of rent, potential disclaimer of the lease, the need to find a new tenant (to whom substantial incentives may have to be offered), and the prospect of having to pay empty business rates for the property if a new tenant cannot be found quickly.
if the landlord acquired the property with third party finance, the reduced rental income will mean that the Landlord has less income from which to meet the interest payments on its borrowing. A breach of the interest cover ratio (i.e. the proportion by which rental income has to exceed interest payments) might lead to the loan being called in.
Even if that is not an issue, the Landlord may need the lender’s and/or any superior landlord`s consent before agreeing to accept a reduced rent. The terms of any facility agreement/charge should be checked.
If the tenant has a guarantor, best practice dictates that the guarantor should agree to the concession and sign a copy of the agreement. Although the agreement should not give rise to a formal variation of the lease, the landlord cannot afford to take the risk that the guarantor might successfully argue that the concession was nonetheless effective to release the guarantor from its obligations under the guarantee, or that its liability is capped at the amount of the reduced rent.
Other common lease terms that may need to be considered in response to the virus are set out below, but much will depend upon the precise terms of a particular lease.
Rent suspension – will a tenant who cannot occupy its premises for a period of time due to the virus still be required to pay rent? Many commercial leases provide for rent to be suspended if a property is damaged or destroyed by, or made inaccessible as a result of an insured risk. Whilst perhaps unlikely to extend to a tenant’s inability to occupy due to the virus, the wording of each clause and of the insurance policy should be carefully checked. Landlords could find tenants attempting to withhold rent in breach of their leases.
Quiet enjoyment – could any steps which a landlord may wish, or be obliged, to take in response to the virus (e.g. preventing or limiting access) be a breach of the landlord covenant for quiet enjoyment or a derogation from grant?
Compliance with laws – any new coronavirus legislation which may be passed by the government could trigger either the tenant’s covenant to comply with laws which affect a property or the landlord’s covenant to provide services (which often contain a requirement to comply with laws in relation to any common areas or retained parts), or perhaps both. In each case, what impact might that have?
Service charge – if a landlord must incur additional costs in connection with the virus, can it pass those costs onto its tenants via the service charge? A well drafted service charge provision should be wide enough to cover this but could be subject to any caps and/or exclusions in place. Service charge provisions should be reviewed. In addition, does the lease allow the landlord to suspend the provision of services as a result of matters beyond its control? If so, what impact might this have on a tenant’s business?
Break clauses – what if there is an upcoming break option? Could all this uncertainty and the risk it poses to a tenant result in a tenant deciding to exercise its break?
Retail leases – if a tenant’s rent is linked to turnover, what will be the impact on the landlord’s rental income if the tenant is forced to close or suffers a reduction in sales due to a significant decline in footfall? Furthermore, if a tenant chooses to close its premises, it could find itself in breach of any ‘keep open’ covenant contained in its lease. But what if it is legally obliged to close? You could have a scenario whereby performance by the tenant of the obligation in its lease to comply with legislation puts it in breach of its ‘keep open’ covenant.
Side agreements – what if a landlord has agreed terms with a tenant which are documented in a side agreement? Could the terms of that side agreement be affected by any steps taken in connection with the outbreak?
Insurance terms – all existing insurance policies should be reviewed carefully. Whether any loss is covered will depend on the type of policy and the extent of cover. Traditional business interruption policies may not cover loss arising from the virus as these generally require damage to, or loss of, insured property and this may be difficult to establish. There are other policies on the market (e.g. policies covering loss caused by a notifiable infectious disease) which may help, however, it will depend on whether a landlord has taken out such a policy and the scope of its terms (including any exclusions).