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Renegotiating A Leasehold During COVID-19

Renegotiating A Leasehold During COVID-19
24th March 2020
 

Virtually all UK businesses rent their HQ and operational premises under commercial leases. As the impact of COVID-19 becomes clearer, the question about reducing tenant leasehold liabilities is increasingly common.

Scott Keown, partner in the commercial real estate team at JMW Solicitors, says: “Although every case is likely to be slightly different, there are several key points that should be considered. Compliance with legislation, insurance policies and break clauses are just some of the points that businesses should be reviewing immediately.”

So, how can companies negotiate sensible solutions to the challenges posed by Covid-19?

Keown, with over 15 years’ experience transacting in the commercial property sector in the UK and Australia. explains his views in this opinion piece

  

COVID-19 – crunch time for business occupiers 

 

As the impact of COVID-19 on the UK economy becomes clear, an increasingly common question is: “What steps can I take concerning reduction (either permanently or temporarily) of tenants’ leasehold liabilities until such time as the consequences of COVID-19 have passed?”

Each case must of course be considered on its own merits, and specific legal advice must be taken on a case-by-case basis, but the following key points are arising repeatedly:

 

Frustration

 

This is where a tenant would argue that the lease is ‘frustrated’ by an event rendering it physically or commercially impossible to fulfil the terms of the lease or where the obligations have been made radically different by the frustrating event and radically different from that contemplated at the time of the lease. As the effect of frustration would be to end the lease entirely, it might not be an appropriate remedy for many tenants.

 

Force majeure

 

This is where one or both parties might not have to perform the lease obligations due to the occurrence of certain events outside of the control of one or both parties. This might be argued to include the COVID-19 virus response.

 

Compliance with legislation

 

If the COVID-19 virus response was for a complete ‘shut down’ of the premises and this was passed into law, then the tenant would not be able to occupy the premises at all. This would not entitle the tenant to stop complying with its payment obligations, but it might provide a basis for commercial negotiations with the landlord, who will need to consider carefully its response to what may be seen to be quite a unique situation;

 

Insurance

 

It is most likely that all risks covered entitling withholding of rent will be limited to those situations where the premises are rendered unusable as a result of physical damage or destruction. Further, the general rent payment clause will prevent any withholding of rent for any reason, even if the tenant had its own claim to make again the landlord for any reason. A check of the tenant’s own business interruption insurance cover should also be undertaken to see if there is anything in that policy which might help.

 

Alienation provisions

 

The alienation provisions of the lease should be carefully scrutinised in the context of the tenant’s feasibility of giving up the whole or only part of the leased premises. For example, it might wish to assign the lease and down-size into cheaper serviced accommodation or share occupation with a third party for a short period of time and thereby share its payment liabilities and whether a landlord would be able to let any part of the premises to a different tenant entirely and on better terms;

 

Rent review provisions

 

If a rent review is pending or in ongoing negotiation, the tenant could seek to agree a rent holiday or reduction for a certain period along with a corresponding agreement as to how and in what circumstances it might be terminated. For example, in exchange for a temporary relaxation of its leasehold payment obligations, a tenant and landlord may pre-agree a fixed uplift of rent on a future date, by which time the effects of COVID-19 may hopefully have passed;

 

Break clauses

 

There are a number of ways in which an existing break clause could be restructured via negotiation between landlord and tenant in ways that could be mutually beneficial in the longer term, particularly if doing so might improve the chances of there still being a solvent and rent-paying tenant once the immediate COVID-19 crisis had passed.

 

Additional update from ThisWeekinFM

 

At the time of going to press (24 March), the government have revealed that commercial tenants who cannot pay their rent because of Coronavirus will be protected from eviction. These measures, included in the emergency Coronavirus Bill currently going through Parliament, will mean no business will be forced out of their premises if they miss a payment in the next 3 months. As commercial tenants will still be liable for the rent after this period, the government is also actively monitoring the impact on commercial landlords’ cash flow and continues to be in dialogue with them.

 

Picture:  How can companies negotiate sensible solutions to the challenges posed by Covid-19?

Article written by Scott Keown – published 24th March 2020

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