Commercial Landlords and Tenants of the British High Street – your questions answered

29
Sep

The British high street wasn’t in great shape before 2020, with many businesses struggling to survive even before the pandemic, but there can be little doubt that the arrival of Covid-19 has hastened its demise. With more and more of us turning to online shopping, people are just not visiting the high street in the numbers they used to and many businesses – including, sadly, some big names in Durham City – simply can’t afford to continue as they were.

There may still be hope for the hospitality sector, at least in the short term, after some restaurants were able to take advantage of the government’s Eat Out to Help Out scheme – which aimed to boost consumer confidence and encourage people back into restaurants – and others have been able to adapt their business model to offer takeaways instead of dining indoors. But sadly, for many businesses, neither of these options offer sustainable solutions to the mounting overheads, and with tighter lockdown restrictions continuing to be rolled out across various parts of the UK, commercial landlords and tenants are finding themselves in an increasingly difficult position.

While the debate continues about how, and indeed if, the British high street can be rescued – with some retail experts arguing for a much more localised approach and a shift in power from Westminster to local authorities – many landlords and tenants are stuck with a Lease which was negotiated in very different circumstances to those they face today and unsure of the best way forward.

Back in June, the government sought to provide some clarity and reassurance to landlords and tenants through the introduction of a new code of practice, which encourages parties to work together in a spirit of transparency and collaboration to protect viable businesses during the pandemic. However, a voluntary code such as this can only go so far and, with the long-term economic impact of Covid-19 looming large, I still have a number of very concerned clients who are unsure of their rights and obligations during this time.  

I thought it might be useful to set out some of the most commonly asked questions that I have received from commercial landlords and tenants over the last few months.

 

Landlord Queries

Q:  Can I forfeit the lease and evict the tenant for non-payment of rent?

A:  No, not at this time.  As part of the emergency Coronavirus Act 2020 (“the Act”), the government introduced measures which prevent commercial landlords from forfeiting leases and evicting tenants for non-payment of rent or other sums, including service charges and insurance rent, from 26th March until 30th September 2020.  Until then, the government is encouraging landlords to act in accordance with the commercial property code of practice and to provide concessions to struggling tenants where they reasonably can.

It is important to note that the Act does not affect your right to receive rent, it just suspends your right to forfeit the lease for non-payment.  Until the moratorium comes to an end on 30th September (or possibly later if the government chooses to extend it) you remain entitled to charge interest on any arrears in accordance with the terms of your lease and to bring other debt recovery proceedings against your tenant.  You also still have the option of enforcing any security which the tenant may have provided on completion of the Lease e.g. parent company guarantees or rent deposits. 

 

Q:  Am I legally obliged to act in good faith when dealing with any requests from my tenant for variations to the lease?

A:  The simple answer to this question is no, not unless there is a specific provision in your lease which requires you to do so.  As mentioned above, the government’s code of practice – which promotes acting reasonably and responsibly in all matters – is entirely voluntary and does not change the underlying legal relationship between you and your tenant.  It is therefore up to you how you wish to deal with any requests from your client, provided of course that you act in accordance with the requirements of your lease. 

However, I would always strongly advise any of my landlord clients to think very carefully before dismissing any such requests at this time.  There could be significant commercial (and indeed reputational) reasons why you should engage with your tenant and act in good faith during any negotiations, particularly where a failure to do so could result in your tenant’s insolvency.

 

Tenant Queries

Q:  Can I withhold or claim a reduction in rent if I’m not trading?

A:  Probably not.  However, as with so many of these queries, the starting point would be to look carefully at the specific rent provisions in your lease.  In particular, you should be checking to see if your lease contains any “turnover rent” provisions, which are sometimes used in retail leases.  As the name suggests, turnover rent is calculated by reference to the turnover generated at the premises.  Turnover rent usually forms only part of the total rent payable so it is unlikely that your rent obligations would disappear entirely, but it could certainly help to provide some breathing space.

In the absence of any turnover rent provisions, it is unlikely that you will be entitled to withhold or claim any reduction to rent for Covid-related reasons.  Rent suspension clauses will usually only take effect if the premises have been physically damaged or destroyed by an insured risk and very few leases contain a “force majeure” clause which could allow you to claim that your rent obligations have been suspended as a result of the pandemic.

The government’s advice to tenants who are struggling to meet their rent demands during this time is to follow the spirit of the commercial property code of practice and try to seek agreement with their landlord to pay what they can. The code also recommends that tenants should be prepared to make reasonable concessions of their own e.g. offering reversionary leases or extended terms in return for rent deferment.

 

Q:  Can I argue that my lease has been frustrated and terminate early?

A:  Unfortunately, the answer is most likely no.  In order to terminate a lease by “frustration”, an event must have occurred which prevents the lease from being capable of performance.  The bar is incredibly high.

When applying this test to the challenges presented by Covid-19 – specifically, the temporary closure of premises and then a subsequent reduction in customer footfall – it is unlikely that these would be sufficient to completely prevent the performance of the lease. 

Instead, I would advise all tenants to review the terms of their lease to see if there are any break clauses that may enable the tenant to terminate the lease early.  There is also the possibility that there may be a force majeure clause which can be relied upon, although, as mentioned above, these are quite rare in commercial leases.

 

Q:  Do I need to keep my premises open if I’m concerned about the health risks to my staff and customers?

A:  If your lease contains a “keep open” or “opening hours” clause – which can be quite a common feature of modern retail leases – and the lockdown restrictions remain at the level they are currently, then, on the face of it, the answer is yes.  Failure to do so would put you in breach of your lease obligations, and you may face a claim for damages by your landlord, although it is worth noting that courts are generally reluctant to enforce “keep open” clauses by requiring tenants to re-open again.

If, however, we find ourselves in another full lockdown and you are required by law to close your premises to the public, it is likely that the government regulations would provide a defence to the requirement to “keep open” and would effectively overrule any other obligations in your lease in this regard. 

In any case, always check whether your lease requires you to notify your landlord of any period that the premises are going to be empty as this may affect your insurance.

 

If you have any queries arising out of this article, or require advice in relation to any commercial property matter, please do not hesitate to contact Kate Stephenson by email at kes@swinburnemaddison.co.uk or by telephone on 0191 384 2441.

 

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