Commercial tenancies during the COVID-19 pandemic

Ivath Khan explores the implications of the pandemic on landlords and tenants of business properties.

Before the pandemic, most business leases required payment of rent on a quarterly basis. At the start of the pandemic, most business were able to pay their March quarter rent.

But as the pandemic continues to interrupt our lives, questions have begun to pour into our offices as people struggled in adapting to the ‘new normal’.

Ivath addresses some of the questions.

Is a tenant able to suspend payment of rent under the lease as a result of the crisis?

The lease will contain tenant rights to suspend rent, if there are any. The tenant will have to check the wording carefully.

Tenant rights regarding rent suspension are unlikely to allow the tenant to suspend rent payments due to the impact of COVID-19.

Can a lease be terminated early?

The simple answer is, without a contractual right to do so, landlords and tenants cannot simply terminate leases early. There are certain situations where it does become possible such as:

• Break rights. A tenant could consider exercising a contractual break right in their lease if they were sure they wanted to terminate (even with landlord’s consent, break notices cannot be withdrawn). Unless specified to the contrary, the tenant would still be liable to pay rent for the duration of the break notice period
• Assignment/subletting. With the landlords’ consent a tenant can assign or sublet their premises in accordance with the terms of the lease. Whether a tenant could find a willing assignee or subtenant in the current climate is the challenge
• Surrender. A tenant could ask the landlord to agree to an early surrender of the lease. However, again in this climate, it would be highly unlikely for a landlord to willingly accept such an offer to end a tenancy and the associated rental income. There will be no requirement for them to do so. The harsh reality is that regardless of the crisis, nothing within the terms of a standard business lease would offer a tenant relief from their obligations.

Luckily, the government has offered a COVID-19 package. This gives tenants some breathing space if they found themselves unable to pay their rent.

Emergency package

The government introduced a series of measures that offered business tenants protection should the landlord seek to take action for unpaid rent.

Government intervention means that a landlord cannot seek to end a lease early for non-payment of rent. The government will protect business tenants in the case that they are unable to pay their rent because of COVID-19. Tenant protection will last until 31 December 2020.

Restrictions on seizing tenant’s assets to an amount equivalent to the rent owed (Commercial Rent Arrears Recovery, or CRAR) have come into place. Landlords cannot seize goods unless they are owed 189 days’ rent.

Previously, a landlord could issue a statutory demand.  This would ultimately lead to a tenant trading as a limited company being wound up. The government has introduced laws that would prevent winding-up petitions from 27 April for any statutory demands served between 1 March 2020 and 31 December 2020.

Code of practice

The government has published the Code of Practice for commercial property relationships during the COVID-19 pandemic to act as guidance for landlords and tenants.

The code, which has significant industry support, applies until 24 June 2021. Although not legally binding, it focuses on a number of principles including ‘transparency and collaboration’, ‘acting reasonable and responsibly’ and utilising ‘government support’ where available.

The code makes clear that tenants who can pay rent should do so. If tenants are unable to make payment in full, they should seek to reach an agreement with their landlord to pay what they can. Landlords should make concessions where applicable. They should provide clear reasons for refusals. Tenants should provide evidence to support their requests.

Options for a landlord

The government’s COVID-19 relief package has undoubtedly relieved the stress for quite a number of business tenants. So what about landlords?

Other options are still available for landlords for unpaid rent, including:

• Pursuing previous tenants or guarantors
• Authorised guarantee agreements
• Pursuing other guarantors
• Recovering rent directly from subtenants
• Making rent deposit withdrawals
• Issuing debt recovery proceedings.

It remains to be seen whether or not the COVID relief packages for business leases will be extended past 31 December. In the meantime, all eyes in the industry will be watching closely.