Options for commercial tenants that are experiencing financial difficulties.
A Commercial Tenant’s Position
If as commercial tenant, you can no longer afford your rent and/or use your premises, what are your options?
Force Majeure / Frustration
The concept of force majeure (which is rarely, if ever, included in leases) and the doctrine of frustration (which has never been successfully used to end a lease) are unlikely to enable you to either end your lease early or to withhold rent on the basis that you are “unable to occupy for reasons beyond your control”. It is always worth checking the exact terms of your lease however, in case relevant exceptions apply.
Force majeure: “force majeure” clauses operate so as to release contractual parties from liability if certain circumstances arise that are beyond the control of those parties and prevent one or more of them from complying with the obligations contained within the contract.
Frustration: where a significant change of circumstances makes the performance of a lease radically different from what was originally envisaged, it can potentially be argued that the lease has been “frustrated”. This would mean that the parties no longer have to perform their obligations under the lease. However, the “frustration” test can be difficult to satisfy, as performance must be radically different, not simply more difficult or expensive.
Landlord’s breach of covenant
If your landlord has been forced to close your building by law, does this mean you can withhold rent or terminate your lease? Under such circumstances, the landlord would arguably be in breach of their obligation to afford you the “quiet enjoyment” of your property and not to derogate from the grant of exclusive possession. However, unfortunately your lease is very unlikely to allow you to legitimately withhold rent under any circumstances and the landlord will likely have a strong defence against breach of covenant.
Invoking break clauses
If you are lucky enough to have a break option coming up in your lease, make sure you understand when and how you must notify the landlord that you wish to break the lease, otherwise you risk missing the relevant deadlines. Break clauses are strictly interpreted by courts, so make sure you carefully comply with any requirements/processes in order to avoid invalidating your break. To that end, we strongly recommend seeking legal advice on all break notices.
If you cannot break your lease, consider whether you can instead assign or underlet it. There will inevitably be companies out there that are succeeding financially (or even expanding) as a result of increased COVID-19-related demand, so you may well be able to find a company willing to take on your lease. There may also be certain circumstances in which a landlord might accept a surrender of the lease.
Insurance is unlikely to be helpful either, as it is not common practice for either landlords’ building insurance or tenants’ business interruption insurance to cover epidemics/pandemics. Again, it is worth checking however, as certain insurance products do explicitly cover these risks.
What should tenants do (and avoid doing) in the meantime?
“Keep Open” covenants
Identify whether your lease contains a “Keep Open” covenant and if so, consider whether you might, on the face of it, be in breach. If you have been legally required or advised to cease business operations, it is unlikely that your landlord will be able to enforce a “keep open” covenant or claim damages in connection with the breach of such covenant. It is however always worth forewarning your landlord of any closure.
“Keep open” covenant: this is a provision sometimes included in commercial leases that requires tenants to trade continuously throughout the duration of the lease.
Vacant premises insurance requirements
Regardless of whether responsibility for taking out buildings insurance rests with you or your landlord, you need to be aware of any requirements and obligations that exist under the relevant insurance policy.
Many tenants will have had to vacate their business premises for extended periods of time, either as a result of having to temporarily close their businesses, or to facilitate social distancing among their staff. Most insurance policies will set out specific requirements that are designed to ensure premises remain secure. Failing to comply with such requirements, even inadvertently, could result in you voiding the insurance and therefore losing your right to claim under the policy in respect of any damage that occurs.
If the landlord is responsible for buildings insurance, you might still be obliged to make up any shortfall to your landlord under an insurance claim if the policy was voided as a result of your own actions or inaction. The Association of British Insurers have been told to be flexible in light of COVID-19, but it remains important that you take appropriate steps to mitigate any damage.
If there any specific requirements that you cannot (or will likely be unable to) comply with, for example compliance with obligations relating to arranging security, inspections or maintenance, we advise you to speak to your broker or insurance adviser. The expectation is that insurers will be flexible and waive inappropriate or particularly onerous requirements. However, we strongly advise you to discuss such requirements with your insurer before committing any breaches.
It is unlikely that the government will cover costs that would have been covered by insurance policies had those policies not been breached, as the government has issued guidance advising tenants to leave all premises secure and with appropriate security measures in place.
At the outset of the pandemic the Chancellor announced a 12-month business rates holiday for all retail, hospitality, leisure and nursery businesses in England. This represents a 100% discount on rates bills from 1 April 2020 for qualifying businesses.
There is also grant funding available for all retail, hospitality and leisure businesses that are responsible for paying business rates in respect of properties with rateable values between £15,000 and £51,000. This is in part in recognition of the general lack of insurance cover for pandemics.
Businesses that don’t pay business rates are not included in this scheme. Those eligible for the grant must have been the ratepayer – according to the billing authority’s records – on the 11 March 2020. Businesses with a rateable value of £51,000 or over are not eligible for this scheme, nor are businesses that are not ratepayers. Further, businesses that were in liquidation or dissolved as of 11 March 2020 will not be eligible.
You should review the relevant local authority website to gain a better understanding of the current reliefs and grants that are available to you.
Government Measures and how do they help?
On 25 March 2020, the Coronavirus Act 2020 was enacted to protect business tenants from being evicted on the basis that they are unable to pay their rent (such circumstances would usually entitle landlords to evict commercial tenants on the basis that the lease has been “forfeited”). This protection was originally put in place until 30 June 2020; it was then extended to 30 September 2020 and has now been extended once again to last until 31 December 2020.
On 26 June 2020, the Corporate Insolvency and Governance Act also came into force and introduced several reforms to the insolvency and restructuring regime in England and Wales. In the context of commercial property, it introduced further measures to protect commercial tenants from landlords that attempt to use aggressive debt collection tactics. This includes a ban on the use of statutory demands between 1 March 2020 and 30 September 2020 and winding-up petitions between 27 April 2020 and 30 September 2020 as a means of forcing payment of rent, unless a landlord can show there are reasonable grounds for believing that COVID 19 has not financially impacted their tenant. The Government has announced that these restrictions are also now due to remain in place until 31 December 2020.
The Government has also prohibited landlords from using the Commercial Rent Arrears Recovery (CRAR) procedure, currently until 31 December 2020, unless they are owed more than 276 days’ rent for notices served between 29 September and 24 December 2020, or 366 days’ rent for notices served from 25 December 2020 onwards.
In addition, on 19 June 2020, the Government issued a Code of Practice for Commercial Property Relationships which, whilst voluntary, provides significant guidance for landlords and tenants around working together throughout the pandemic.
However, tenants must beware that:
- These measures are not waivers of the obligation to pay rent in respect of the relevant periods. Tenants remain liable to pay their rent and related expenses under their leases (including service charges and insurance) and at the end of the period of protection, any unpaid rents will become due, along with any interest that has accumulated.
- Landlords are still entitled to drawdown on other security (if any is in place, for example rent deposits) and tenants will ordinarily be contractually obliged to top up their deposit or risk forfeiture at a later date.
- Landlords can still rely on guarantees provided by third parties (either as guarantors in the lease or under Authorised Guarantee Agreements) if tenants are unable to meet their lease obligations. Depending on the terms of a guarantee, guarantors can be required to comply with the tenant’s covenants in the lease and even to enter into a new lease with the landlord if the tenant becomes insolvent.
- There will inevitably be some landlords that decide to commence forfeiture proceedings or take other enforcement action as soon as the suspensions are lifted.
This protection does not apply to leases of less than 6 months or to licences of any duration.
Does the advice differ to those occupying under a licence?
Many shorter-term property agreements, as well as agreements to occupy office suites in co-working buildings (e.g. those operated by WeWork and Spaces) are expressed to be “licences” rather leases. Unfortunately, the forfeiture suspension under the Coronavirus Act 2020 will not apply to licenses, so it is important to check whether you might have a licence rather than lease (this is quite a technical area of the law, but our property specialists can assist if you require bespoke advice).
Great care needs to be taken with licence agreements, as although they offer many benefits (in terms of the facilities to which they afford access), the agreements themselves can often be very onerous. This can be especially problematic because many “occupiers” (this is the word used instead of “tenants” in the context of licences) mistakenly believe licences to be more flexible and less onerous than full commercial leases, so often do not seek legal advice before signing licence agreements.
For example, we have recently reviewed several licences that allow the landlords to charge rent upfront in respect of the entire licence term if they become entitled to terminate the licence early as a result of the occupier breaching the terms/failing to pay on time. Such licences also tend to include very broad powers for the landlord, for example powers that allow landlords to:
- Move occupiers into alternative spaces that are not necessarily of equal quality/size;
- Suspend all services without recourse; and
- Take harsh action in relation to the failure of occupiers to pay on time.
We would strongly advise that these types of clauses are carefully considered before deciding how best to proceed, ideally by a property lawyer.
Negotiating other concessions
Crucially, this period of protection from eviction gives tenants time to negotiate rent concessions with their landlords, without risking forfeiture or facing other draconian rent collection measures, and the Government’s Code of Practice for Commercial Property Relationships (mentioned above) is designed to help facilitate these discussions.
Remember that it is not, by and large, in a landlord’s interest for its tenants to go insolvent or to forfeit the lease; under such circumstances, the landlord may subsequently find that they cannot re-let the property and will therefore be responsible for all obligations relating to the property and its upkeep.
On that note, here are some examples of the provisions to which landlords and tenants have been agreeing throughout the pandemic:
- Changing from quarterly to monthly rental payments, to help manage cash flow.
- Agreeing a period during which rental payments will be suspended (and then repaid at a later date).
- Agreeing a period during which rent will not be charged (“rent-free”).
- Reductions in rental rates.
- Agreeing that the landlord can deduct funds from the rent deposit if they waive the tenant’s obligation to top it back up (in the short-term).
- Landlords agreeing a rent free period in exchange for tenants agreeing to remove their break clauses from their contracts or commit to longer terms.
- Landlords agreeing to move tenants to smaller, cheaper units where they have the ability to do so.
- Landlords agreeing to surrender leases early in exchange for permission to retain the rent deposits.
There may be other ways of reducing financial commitments under your lease. For example, you could open a dialogue with the landlord and other tenants in the building and try to collectively agree a reduction in the provision of communal services (in order to decrease service charges).
Beware of agreeing to more onerous conditions (e.g. an extension of the rental term) in exchange for your landlord agreeing to offer rent concessions, especially if you are not certain that you will be able to meet/comply with such conditions.
Also remember that landlords will almost definitely reserve their rights to all other remedies and some will inevitably start forfeiture proceedings the minute the suspension is lifted, so try to keep this in mind when managing cash flow.
Crucially, make sure that whatever you agree verbally is then documented in writing and signed by everyone involved (otherwise you might find it hard to defend a future claim for breach of the lease). Often this can be achieved with a straightforward side letter.
How Can Ignition Law Help?
Our property team acts for a wide range of clients, including landlords, tenants, buyers and sellers. We can handle the full spectrum of property matters, from the usual to the very unusual, for example:
- Advising on and negotiating documentation for new leases, licenses and other property-related rights;
- Advising on and carrying out property due diligence when purchasing/selling companies that own or lease properties;
- Advising on all purchases and dispositions of property;
- Advising on all contentious property matters, including service charge disputes and dilapidations claims;
- Insolvency and forfeiture-related issues; and
- Advising on environmental, planning and construction matters.
Ignition Law provides a unique, seamlessly integrated legal services offering that has helped thousands of entrepreneurial and ambitious start-ups, scale-ups, VC-backed SMEs and other high-growth enterprises secure investment, meet their governance obligations and rapidly scale.
In the first instance, please don’t hesitate to contact:
- Cath Campbell- Barnard: email@example.com
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- Lauren O’Sullivan: email@example.com
- IgnitionLaw’s property team: firstname.lastname@example.org
- IgnitionLaw’s office: +44(0) 203 432 4020
This short guide has been prepared for directors and owners of private limited companies for information purposes only, in particular to provide a summary of the options available for tenants that are experiencing financial difficulties. This guide does not constitute legal advice and should not be relied upon. For specific queries and any further information, please contact Ignition Law for advice relating to your particular circumstances.