After the immediate shock of the lockdown and the March quarter day which came soon afterwards, commercial property landlords are taking stock and working out their options for the next few months. Landlords who take the right steps now, with the right advice, will have the best chance of preserving a strong portfolio for the future.
‘Collaboration will be the key to surviving this economic shock,’ says Ian Cowan commercial property solicitor with Richard Reed. ‘Commercial property tenants are leading the way with requests to defer rent and make other changes to their leases.’
Most commercial property landlords understand the need to work with their tenants but it is important to discuss any proposals with your solicitor, who will explain any long-term consequences and make sure any changes are properly documented.
If a tenant asks for an immediate rent concession, there are a number of things to consider:
- Is the landlord agreeing to waive the rent altogether (so it is effectively written off) or is it just deferred?
- If the rent is deferred, when will it be paid? The best approach is to agree a timetable for repayment now. Nobody knows when the situation will change and it seems likely that some businesses will be able to open sooner than others, so the landlord will want repayment to be triggered when the tenant is able to trade again, not simply when all the restrictions are lifted.
- Can the landlord and tenant agree monthly rent payments, to ease cashflow on both sides? If so, how long will this last and does the landlord want the right to end the concession early?
- Does the concession apply only to the quarterly rent or does it include service charge and insurance? Even where a property is closed, a landlord has to insure it and provide basic services, and so could suffer additional loss if the tenant does not contribute.
- Is the tenant’s business genuinely in difficulty? Some commercial landlords report requests for rent concessions from tenants who they feel could carry on paying.
- If the landlord has finance secured against the property, they will probably need their lender’s consent to agree any rent concessions. Lenders are likely to take a pragmatic view but it is important to talk to them.
Short-term rent concessions should be documented so that they are temporary and personal to the current landlord and tenant. Longer-term changes to the lease need more formal documentation and will be permanent, binding anyone who buys the landlord’s property or tenant’s interest in the lease.
Some landlords are agreeing extended rent-free periods in return for tenants postponing break dates. Some retail tenants are asking for more of their rent to be based on their actual turnover.
Landlords should look carefully at any requests for new clauses allowing the tenant to stop paying rent in a future pandemic or similar situation. The drafting can be very wide and the landlord may not want to agree to it except in a fairly short lease. Landlords are comfortable with rent cesser provisions where the property has been damaged, because the lost rent can be recovered through insurance. No one yet knows whether insurers will be willing to offer cover for future pandemics or whether they will be uninsurable, so there is a real risk if a landlord agrees a new provision now.
Enforcing tenants’ payment obligations
Landlords currently have few options for taking action against tenants who do not pay rent that is due. The Government has introduced emergency legislation to prevent landlords forfeiting leases for non-payment and is extending this to stop landlords bringing insolvency proceedings where tenants are in difficulty because of COVID-19.
Evictions are equally difficult, because court possession proceedings are formally halted. These measures will currently run until the end of June 2020 but could be extended.
Help for landlords
Until now, much of the Government support has been targeted at tenant businesses. A broad coalition from the wider property market has called for specific support for landlords who have lost their rental income, effectively a scheme for ‘furloughed’ commercial property. This is a fast-moving situation, so landlords should be in close contact with their solicitors to keep track of any new developments.