During these unprecedented times, where the situation is changing on a daily basis, we are aware that individuals and business owners will have many questions and uncertainties about how these developments impact on them.
Here, through a series of Q&A with expert lawyers from across our firm, Sintons hopes to be able to answer some of those pressing questions, and provide some certainty and clarity for people who are unsure how to proceed.
We will bring you a question and answer per day for the next few weeks.
Q – I entered into a commercial lease prior to Coronavirus but now I am struggling to keep up with its terms. What can I do?
A – The Government has introduced, as part of the Coronavirus Act 2020 (“the Act”), a suspension of the forfeiture provisions in commercial leases, to assist tenants during the economic uncertainty of the pandemic. So what does that, in practical terms, mean?
Forfeiture is a standard clause in commercial leases which enables landlords to bring leases to an end when tenants haven’t paid rent, have breached obligations in the lease and also, usually, as a result of insolvency. The detail behind the Act provides that if a rent payment is missed, forfeiture action is suspended until 30 June 2020 (that includes any forfeiture proceedings that are currently underway via the courts) but that date may be extended by the Government, if required. Once the period has expired the suspension will fall away and a tenant may then be at risk of being forced out of its premises if a rent payment is missed. Forfeiture for breach of the tenant’s covenants in the lease and insolvency are not affected by the Act – it is only for rent.
The intention behind the legislation is to give tenants a window of time to try and make some sense of the way forward, without the additional pressure that its landlord may take the premises from under its feet. However the Act only suspends the forfeiture power, it doesn’t side step the obligation to pay the rent – that will still remain.
The steps being taken the Government’s steps are important but the indication is that many landlords are taking a pragmatic approach, speaking to tenants and offering rent free periods or other concessions. Landlords are very much aware that vacant accommodation may not bode well, in the post lock down economic climate. As well as, potentially, struggling to find new tenants on the same terms having to bear the cost of business rates, insurance and security costs is something many landlords would rather avoid. Having to take reduced rental income and working with tenants may transpire to be, commercially, the more beneficial option than ending up with voids for, potentially, many months to come.
If changes to the occupational arrangement are agreed they could be evidenced by way of a side letter, which would be a personal arrangement between the parties and the lease itself would remain unchanged. One point to check is vat, particularly if a vat invoice for the higher rent has already been issued. The simple solution may be to issue a credit note to cancel any vat liability, keeping accounting records in order. The alternative, if the concession is to last in the long term, is to formally vary the lease. However, due to legal technicalities, care needs to be taken as, from a tenant’s perspective, that could result in additional expenditure in the form of stamp duty liability.
So, overall, the Act is welcome to provide a degree of breathing space to tenants who are unable or struggling to pay rent in these uncertain times and the market, going forward, needs to be carefully monitored for both landlords and tenants. Communication between the parties and maintaining an open dialogue seems to be key to try, from both sides perspective, to come out of this crisis as unscathed as possible.
For further advice on this or any other commercial real estate related matter, please contact Louise Kelly, on louise.kelly@sintons.co.uk or 0191 226 7807.
