Many businesses, especially those in the retail and leisure sectors, were impacted early on in the Covid-19 pandemic due to the Government's guidance on social distancing, more so now however since the Government's imposed lockdown and closure on non-essential shops.
Despite the Government's support offered to businesses, Covid-19 is of course going to have an extensive effect on a business's ability to continue to meet their overheads and obligations under their lease during this uncertain period, including their ability to pay their rent.
We as a firm have been approached by a number of landlords and tenants already requesting advice in relation to their position and options as to their obligations under the terms of their lease/tenancy, and how to approach one another regarding potential rent holidays/reductions without affecting the remaining terms of their lease. We have therefore put together these helpful FAQs to help clarify both the landlords and tenants' positions and the options available to you both. If you have any queries which are not covered below, then please do not hesitate to contact our Client Relations Team on 01603 693500 or by using the 'Make an enquiry' form on our website.
My tenant has approached me requesting a rental holiday due to Covid-19, am I obliged to give them one?
The simple answer is no, however, if your tenant is unable to pay their rent during this period (up to 30 June 2020 subject to extension by the Government) you are unable to forfeit the lease and evict your tenant as a result of this (section 82(1) Coronavirus Act 2020). It is worth noting that the term "rent" is not limited to what you conventionally deem the rent payable, but can also include other sums due under the terms of the lease such as the service charge, insurance rent etc.
This will not dispose of your tenant's obligations to pay their rent that has accrued during this time, which they must pay to you following the expiration of this period. You may suggest that they pay the rent accrued during this period pro rata over their remaining rent payments, of that they pay this in one lump sum etc.
Please note that by not forfeiting the lease during this period, you are not waiving your right to forfeit the lease under the terms of the lease unless you have expressly agreed otherwise with your tenant (section 82(2) Coronavirus Act 2020).
However, it may be that, to ensure you still receive an income during this period, you may wish to agree a rent reduction during this period so that your tenant continues to pay their rent but at a reduced rate, which then returns to the full value after this period. By doing this, you will still receive an income during this period, and your tenant is not then faced with owing the full amount after the end of this period, when they may still be struggling to catch up.
I want to offer my tenants a rental holiday, how can I approach them regarding this?
In the first instance, you must first consider each of your tenants' position on a case by case basis. It may be that, for example, if they are an essential shop and remain open they see an increase in their income due to the closure of other shops and therefore would not require a rental holiday or reduction. You should not take a blanket approach to all of your tenants.
Next you should ask the tenant if they have applied for the various forms of support and relief offered by the Government (e.g. business loans, deferment of VAT payments etc.) as these should be explored by your tenants first; a rental holiday, reduction or deferment of their rent should be a last resort.
You should then look to the terms of the lease or any rent deposit deed as you may be able to use a deposit paid by the tenant towards their rent during this period on the basis that they 'top-up' the deposit to its full amount once they are in a position to do so.
Once the above has been established you might want to offer the tenant a rent reduction and/or rent deferment. In both cases, you can ask that your tenant pays the difference between the whole and the reduced rate, or the rent that would have accrued during this period, on a pro rata basis over the remainder of the lease term or in a lump sum etc.
On a side note, in consideration of you offering a rental holiday, deferment or reduction to your tenant, you may also wish to consider what you can ask for in return. It may be that there is a tenant break option in the lease which you could agree to delay, or remove altogether. Alternatively, if you have a rent review looming under the terms of the lease based on the market rent, you may wish to agree to delay this to a time where the market rent is going to be more certain and will have picked up.
If you do decide to amend the terms of the lease one way or another in consideration of you offering a rental holiday etc, and your tenant agrees to this, you would need to record this by way of a deed of variation to the lease.
I want to approach my Landlord about a rental holiday, what should I consider first?
You should first consider whether you have sought any assistance/relief provided by the Government as a landlord might be more willing to assist you if you have first tried to exhaust the other options available. The Government are updating the support and relief available to businesses on a daily basis which can be found on the Government website at https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses.
If you have taken advantage of the support offered by the Government and are still unable to meet your overheads and rent, you should then consider your financial position and whether you are able to meet a reduced rent. Please note that if you are unable to meet your rent during this period (currently up to 30 June 2020 under section 82 of the Coronavirus Act 2020), you will still be liable to pay this in full following the end of this, so you might wish to be mindful of your future financial liability and consider an interim option that would reduce the extent of that liability at the end of the protectionary period.
You should also consider whether there are any further concessions you may be able to make which would help you to meet your obligations under the lease, i.e. paying your rent in arrears rather than in advance, or to switch your payments to monthly rather than quarterly. You should suggest these to your landlord if you feel that these would enable you to continue to meet your rent during this period. If your landlord does agree to these, these should be recorded in writing.
If, after considering all of the above, you are still not in a position to be able to settle your rent you should then approach your landlord regarding whether they are able to offer you a deferment in your rent or a rental holiday – please note that they are not obliged to agree to either and, if they do agree, they may ask that the rent accruing during this period is paid in full to them under different terms.
Please note that your protection from eviction is only temporary and, although they are unable to forfeit the lease and evict you during the period provided for by Government or by agreement between you and your landlord, their ability to do so becomes "live" again following the end of this protectionary period.
Should I record this agreement in the lease?
If you agree to any changes in payment terms or to a rental holiday, deferment or reduction, you should record this in writing as a side letter to your lease which should be stored alongside this. Ideally each party should hold a signed and dated copy of it.
This side letter should record the following:
- The amount of rent due if you have agreed to a rent reduction;
- The period for which you are offering this break/deferment/reduction;
- When it becomes effective;
- Whether their rent to the effective date/next payment date is expected to be paid in full; and,
- If deferment, how will the deferred payments be made to you, i.e. on a pro rata basis or in one lump sum.
You should also make it clear that following the expiration of the period you are offering, that the rent returns to the full value (if agreed) and that this will not affect the remaining terms of the lease.
My tenants rent is based on turnover and they are currently not trading, what are my options?
You should look to your lease, it is common in most leases where the rent is based on the tenant's turnover to include a provision for a base rate of rent the landlord is to receive, or a notional rent due if the tenant is unable to trade for any reason.
There may also be a provision which says that if the tenant is unable to trade then the rent will switch to a market rent.
I own a multi let property to a number of Tenants, some of whom remain open due to them being classed as essential shops. What is my position with closing the whole premises?
For various reasons such as the welfare of employees and the potential risk to the public, multi-let buildings such as shopping centres closed their doors during the pandemic. In these circumstances the tenants might seek to rely on a force majeure clause which removes liability for a breach of contract as a result of a natural, unavoidable catastrophes that interrupt the normal flow of business, such as an act of God. However, it may be unusual to find a force majeure clause that would be triggered by these circumstances that you would be able to rely on when closing the premises. You would need to look at the specific wording of this clause in each of your tenant's leases.
If there is no force majeure clause or one is not triggered and there are no other clauses within the lease that you are able to rely on in these circumstances, then closure of the premises may be deemed a derogation from grant or breach of quiet enjoyment of those tenants who are able to remain open. As a consequence the tenant(s) may be able to terminate their lease altogether.
If all of your tenants are in agreement, you may be able to close the centre as a whole, however, should those tenants that are classed as essential wish to remain open, you may then have a to look at alternatives. One option might be to close the common parts not required, only allowing access to those shops that remain open. You may have the power to do this under the terms of the lease as most leases allow for closure of the common parts in an emergency. It would be difficult to argue that Covid-19 is not an emergency under these terms.
Should you have any queries relating to any of the above, or require any assistance in documenting any changes to the terms of your lease or an agreement relating to the rent, then please do not hesitate to contact us on 01603 693500 or email us using the 'Make an enquiry' form.
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*This article is provided for general information purposes only and does not constitute legal advice or other professional advice.
