Commercial tenancies – 10 steps to take to protect your assets in unfamiliar times

The Coronavirus pandemic has taken us into uncharted territory with numerous steps being taken to instigate emergency measures from both a healthcare and an economic perspective. We envisage that a number of you will have also undertaken your own robust testing of your emergency plan with people working from home and staff being redeployed to key currently affected areas (retraining as appropriate) to ensure that you can continue to operate your business.

RP’s primary focus is at the moment, quite rightly, on their residential tenants. But many RPs have significant commercial property portfolios and these need care and attention too.  The pandemic will have had an impact on all of the businesses that trade from premises you own and let. We have already seen some retailers file for administration in the last few weeks including Cath Kidston, Brighthouse and Laura Ashley as trading conditions become more challenging.

We have put together a note of ten below on some of the key commercial points that have arisen recently as well as pulling on our knowledge of previous cyclical events in the economy. We have set out below 10 points for you to consider when reviewing your commercial property portfolios. The team are happy to talk through individual situations/strategies with you to help you mitigate the risks to your business.

1. The Rent Roll

We have just passed the traditional March quarter day for payment of the annual or principal rent. Take steps to review the payments made and look where there are any gaps. Look at the past history – is a short delay normal for this tenant? Have you followed up on this? Look at the nature of the occupiers’ business and whether they will still be trading or will have been required to temporarily close or adapt their business to a delivery or online platform. A prudent tenant should have set aside monies for this forthcoming rental liability –  it was not unexpected as it happens every quarter or month as appropriate! However, undoubtedly most businesses’ cash flow will have been impacted. The tenant may simply be paying once ‘reminded’. Remind them!

2. Put yourself on the front foot and talk to your tenants

Some tenants, particularly in the leisure and hospitality sectors such as bars and restaurants, have struggled and have in effect been ordered to close in response to the government’s emergency measures to limit the impact of Covid-19. Other types of business have reportedly thrived particularly those offering an online  functionality. The ‘successes’ to date include pizza delivery businesses, Zoom (video conferencing) as well as online sellers. Not everyone has been affected in the same way. You will not know the true position unless you speak to your tenants. They will give you direct insight which you can use to assess which of the other measures below are most appropriate. Go on, pick up that phone!

3. Rent Cesser provisions

Most commercial tenancies include a rent cesser provision whereby the tenant is not obliged to pay the annual rent and sometimes the service charge if the premises are damaged by an insured risk.  The norm is that this relates to damage to cover things such as burst pipes, fire etc. However Covid-19 does not damage the building/property itself.  You should therefore look at both the wording in the lease for the insured risks and potentially any additional protection for ‘uninsured risks’. The definition of the latter varies considerably and may simply be the expressly defined Insured Risks (as set out in the lease) for which cover is not available in the current insurance market all the way through to any other risk which is not an Insured Risk as defined in the lease. Assess the lease to see whether the cesser provision may apply but note point 4 below. Note that this insurance/rent cesser area has been increasingly negotiated over recent years and each lease is likely to be slightly different.

4. Contact your insurers

Those with property portfolios such as your own have increased buying power. This means that the insurer will offer enhanced cover. It may be that this enhanced cover includes pandemic and/or government measures (commonly referred to as ‘acts of government’) that lead to buildings being closed. You will need to look at the small print and/or contact your broker. It is common to see a ‘catch all’ provision in the definition of an insured risk  in a lease  along the lines of ‘such other risks as the landlord from time to time insures against’. This would ordinarily mean that if the landlord has a wider level of cover for its portfolio, their tenants will also benefit from this. We are in the grey area of the insurance market as effectively the government has advised most retailers to shut down (excluding those deemed to be essential (please click here for the government guidance). Some insurance policies include risks as epidemic /pandemic cover, closure due to acts of the government or access (to the premises) being prevented – others do not. Unfortunately, we suspect at this time you may not get an definitive response but you will at least know how the insurers are proposing to deal with matters currently and you can lodge a claim as appropriate.

5. Rental holidays/additional rent free.

Some tenants are demanding rent free periods and some of the larger tenant operators (such as Burger King)  have been putting soundbites into the media that they will not pay the March rent. In our opinion an open conversation is best. This is all unexpected and in all likelihood neither party expected the Covid-19 measures announced by the government when they entered into the lease and so we need to find a way to adapt and find ways to mitigate positions. People DO remember how they were treated/relationships. As a landlord, you don’t really want the void unit and in most cases an occupied retail unit can claim business rates relief (see steps to support business comments below) at least in the short term (note different classes of assets have different applicable rates relief provisions). If the tenants address this thorny area, consider how best that this could be achieved. We would also suggested that they provide their accounts as evidence to support any claim of financial difficulty. There are many ways that you can address this area – e.g. an additional rent free period, a short rental holiday akin to a mortgage holiday with the rent being paid back at a later date or an extension of the term to bolt on the additional period. Think about which operates better for the parties. Once agreed, set out the arrangement in writing as set out at 6 below. Remember there is a risk that you are kicking down the road a decision about a poor performing business but that may be better than to inherit the cost of holding a vacant unit.

6. The Coronavirus Act 2020 (CA Act)

S82 of the newly enacted CA 2020 deals specifically with commercial tenancies. It introduces a moratorium on landlords of commercial property (being those tenancies to which the Landlord and Tenant Act 1954 (’54 Act) applies) from taking action against their tenants for failure to pay rent from 26 March 2020. This moratorium will run until 30th June 2020 but may be extended as necessary given the pandemic. This period is referred to as the ‘relevant period’. The CA 2020 only prevents the landlord exercising forfeiture in respect of non-payment of rent only. Therefore, if a tenant breaches the terms of its lease then landlords are still able to use forfeiture provisions (subject to the terms of the agreements in place and the corresponding s146 notice required). As noted above, the landlord’s conduct (during the relevant period) other than by an express waiver in writing, is not to be regarded as waiving a right of re-entry or forfeiture for non-payment of rent. Thus it is still open to landlords and tenants to enter into a dialogue to address their current situation and plan the best way forward.

7. Landlord covenants

It is common for the landlord to provide covenants in a lease for quiet enjoyment to enjoy the property that they have let, often to insure the property but potentially also to provide services and allow access. At this stage the government has not required multi-let office premises or shopping centres to close. However, that may change. The CA 2020 does contain powers for the government to close and/or restrict entry to premises. If you have covenanted to provide services or ‘keep open’ consider the impact of a potential breach. If it is outside of your control such as a government order a tenant will understand (perhaps begrudgingly). A unilateral closure that stops their business in its tracks is less likely to be well received.  Consider how you can adapt the services available to reflect the availability of your staff and the needs of the tenant(s). There will be few businesses seeking an all singing and dancing level of services  – sensible steps you can take to cut the service costs will be appreciated.

8. Force majeure

Force majeure clauses are contractual provisions which alter the obligations or liabilities of the parties under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations. Where a contract contains a force majeure clause, the party relying on it would typically need to show that the event was beyond their control, that the event prevented or delayed their performance of the contract and that all reasonable steps were taken to mitigate the event. In terms of Covid-19, a force majeure clause  including reference to “pandemic” or “epidemic” would be beneficial to a tenant seeking to exit their lease. Alternatively, they may seek to rely on some catch-all wording such as “Act of God” although that will require careful consideration of the above principles. Remember that you may also be party to other contracts with force majeure provisions in other areas of your business.

You may see attempts by tenants to argue that their lease should be terminated due to force majeure. Currently, under English law the established principle is that changes in economic or market circumstances which affect the ability of a party to perform its obligations and correspondingly profitability, are not regarded as being a force majeure event. However, that does not mean that the argument will not be run in the future in relation to leases or other contracts your business has entered into and Covid-19 introduces a pandemic into this theatre and so the position may change as disputes reach the courts. Prepare yourselves and remember that the party claiming force majeure relief is normally under a duty to mitigate against the event  – it is not simply a way to tearing up what are now perceived to be ‘bad bargains’. For more information on force majeure, please read “Is Covid-19 a force majeure event under your contracts?”.

9. Alternative Temporary Uses

You may already be holding a number of vacant units across your portfolio. It will be difficult to let these in the short term. Consider whether they could be redeployed for use by the NHS for surge facilities, storage of equipment etc or by a charity for similar usages.  This would bring them back into use, mitigate the holding costs for the assets (e.g. business rates) and potentially provide support at a much needed time. We have a number of clients in contact with the NHS and their advisors to make space available. Alternatively you may decide that actually it is clear that the commercial space you have is not fit for current purposes and alternatives uses should be considered. Take this opportunity to consider such uses.

10. Talk to other businesses and your advisers

We have sought to set out the immediate impact of the Coronavirus on commercial property but this does vary considerably on a case by case basis. Almost all businesses are constantly discovering things that they accepted as ‘normal practice’ no longer apply. People are adapting and sharing knowledge and ideas. As a business, Devonshires have had to adapt to working from home as the new norm. Similarly other business you work with will have similar stories. People will usually share those easy wins. Some of the positives that have come of this pandemic are the ability to problem solve, community spirit as well as the use of technology to achieve their aims. Embrace it and pick up that phone and hear the resilience of business in practice!

Steps to support businesses

Some of the points below may help your own business but we have set out a short summary of some of the government measures announced as a number of these may be useful to your commercial occupiers. Follow up your initial contact by pointing your occupiers in the right direction on the government website for steps as to how they can make use of the measures for their own business. We’ve set out the link below for ease of reference.

  • Coronavirus Job Retention Scheme – all UK employers will be able to access support to continue paying part of their employees’ salary for those employees that would otherwise have been laid off during this crisis (furloughed workers)  HMRC will reimburse 80% of furloughed workers wage costs – capped at  £2,500 per month.
  • Deferring VAT and Income Tax payments – businesses VAT payments are deferred for 3 months.
  • Statutory Sick Pay relief package for SMEs – legislation to allow small-and medium-sized businesses and employers to reclaim Statutory Sick Pay (SSP) paid for sickness absence due to Covid-19.
  • 12-month business rates holiday –for all retail, hospitality, leisure and nursery businesses in England for the 2020 to 2021 tax year.
  • Small business grant funding of £10,000 – for all business in receipt of small business rate relief or rural rate relief.
  • Grant funding of up to £25,000 per property – for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000 is available under the Retail and Hospitality Grant Scheme.
  • Support for nursery businesses that pay business rates –a business rates holiday for nurseries in England for the 2020 to 2021 tax year.
  • Coronavirus Business Interruption Loan Scheme – loans of up to £5 million for SMEs through the British Business Bank  providing access to loans, overdrafts, invoice finance and asset finance of up to £5 million and for up to 6 years.
  • A new lending facility from the Bank of England to help support liquidity amongst larger firms.
  • The HMRC Time To Pay Scheme – all businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service.

Further details are all available on the government website with key guidance for businesses.

If we can provide further assistance in relation to any of the above, please do not hesitate to contact Dan Moan, Ollie Grech or any of the partners in the Real Estate & Projects team.

In the event that you have specific insurance queries please contact Stephen Netherway.

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