As commercial landlord and tenants deal with the turbulence caused by lockdown restrictions, we take a look at what lies ahead for those with an interest in commercial property.
The ban on evicting a tenant for non-payment of rent is set to expire on 31 December 2020. Once the ban is lifted, landlords will be able to start proceedings to recover outstanding rent. In some cases however, tenants may simply be unable to pay. The landlord will have a choice: evict or seek an alternative solution.
In a difficult market, the second option may be preferable to having commercial premises standing empty.
Compromise solutions where tenants have difficulty meeting their rent obligations
Deferral, reduction or suspension of rent
According to Communities Secretary, Robert Jenrick, many commercial landlords have been offering tenants rent deferrals or holidays. It is important that any agreement is put in writing so that the details can be referred to and misunderstandings avoided. In return for any reduction in rent, landlords may ask the tenant to agree to a longer-term.
Previously the domain of retail tenants, turnover rent is now a real possibility for other businesses, particularly in sectors such as hospitality, where income can be non-existent if a lockdown is imposed.
Calculating a portion of the rent on the basis of turnover gives tenants a breather while their turnover is poor, but allows a landlord to benefit from increased profits once the business is back to full strength. For more detail about how a turnover rent works, see our article Requesting a turnover rent.
Landlords may want to rethink any ban on subletting whole or part of a premises that is included in the commercial lease agreement. Where a tenant cannot pay but is able to find a replacement who can, the opportunity exists to receive rent without having to evict and find a new tenant. Security will be provided from the original tenant, with the lease drafted so that they remain responsible for unpaid rent, any damage to the property and other liabilities.
Agreeing a commercial lease post-Covid-19
As the country emerges from Covid-19, new tenants may find themselves in a strong negotiating position with a range of commercial premises to choose from.
Possible provisions to be included in new commercial leases include the following:
Where a shorter lease could be advantageous to a tenant, this is something they may be able to bargain hard for. In a difficult financial climate, a shorter lease is less of a commitment to a business that may be uncertain of its success. If the business does well, there is a good chance they will want to extend the lease in any event.
More break clauses
Similarly, a tenant may want more opportunities to end a lease written into the agreement to allow them an exit strategy. As well as standard break clauses, tenants could request a clause tailored to be enforceable if they are unable to use the premises.
If working from home and flexible working becomes the norm, tenants may want the option to sublet part of a premises. Commercial leases often prohibit this, but in an uncertain future it gives the tenant flexibility along with the option to scale down its own operation and share the rent burden.
Rent suspension clause
Rent suspension clauses currently only refer to circumstances where premises are damaged or destroyed. In future, a commercial tenant may seek to include a clause giving them the right to suspend rent payments in the event of a pandemic or similar event where they are unable to occupy their premises.
There are uncharted waters ahead for commercial landlords and tenants. Any agreement or concession must be put into a legally binding document to protect the interests of each party and to ensure their rights are enforceable in court.
In negotiating any new lease, it is important to have a strong legal team on your side to ensure you get the best deal possible, particularly in uncertain times.
At RSW Law, we have wide experience of agreeing and drafting commercial leases and you can rest assured that your rights and interests will be protected. Our advice is practical and we always focus on our clients’ business interests and success. Our lawyers work in many areas, including financial services, retail, leisure, property and professional services.
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