Posted by Ian McEwan, Partner
Rents in the time of coronavirus
The effects of the unfolding coronavirus crisis on commercial property occupancy have been nothing short of seismic.
Pubs, restaurants and leisure centres across the country have closed. While not expressly told to close by the Government until 23 March, most retailers had already followed suit. All these businesses, along with many corporate occupiers – and their landlords – are feeling the pressure and grappling with the uncertainty.
In these uncertain times, with turnover down considerably and a lockdown now in place, we are finding that many tenants are approaching their landlords for a concession on the rental payments due under the terms of their lease to try to ease their cash flow problems, without which they may go out of business very soon.
For some landlords this is not an immediate problem, and short term measures can be put in place to help their tenants trade whenever possible through this period.
For others, preserving the immediate rental income is crucial. What can be done?
We act for both landlords and tenants and are seeing this from both sides of the table.
What options are there for landlords?
From a landlord’s perspective, the usual remedies available for non-payment of rent are all available.
- suing for the debt
- forfeiting the lease to take back possession
- serving a statutory demand before issuing insolvency proceedings
- using the commercial rent arrears recovery procedure known as CRAR, and
- drawing upon funds held in a rent deposit.
In certain circumstances a landlord may also be able to pursue a former tenant or a guarantor for the unpaid rent.
These remedies are subject, however, to the introduction of a 3 month forfeiture moratorium on commercial leases announced on 23 March, which prevents landlords from terminating a tenant’s lease if they are unable to pay rent because of the impact of coronavirus on their business.
Is enforcement action worth it?
Despite these options being available, it may not be in the landlord’s best interests to pursue them at this time.
For example, if the tenant really is on the brink of collapse, there will be little merit in pursuing it for the debt if no funds will be available to settle payment.
Likewise there will be little advantage in taking back possession of a unit that a landlord will be unable to re-let, and a landlord could in fact find itself in a worse position if it then becomes liable to pay the rates for the empty property and fronting any attributable service charge contribution.
Varying the terms of payment
An alternative option is to vary the terms of payment by agreeing a rent concession with the tenant.
The form that the concession may take is flexible, and will vary from case to case depending on the parties’ positions.
Many tenants pay their rent on a quarterly basis, so one option to help manage cash flow is to move to monthly payments.
Payment of rent is usually required in advance. So changing to payment in arrears (at the end of a month or quarter) is another option.
Some landlords may be prepared to agree a temporary rent reduction.
Some may agree to defer payment for a while, and others might be prepared to take a longer term view and waive payment entirely for a set period.
A combination of all of the above is possible, and payment plans can be put in place to make up some or all of the shortfall in due course.
Put it in writing
Whatever arrangement you come to with your landlord, or your tenant, it is vital that you record the terms correctly so that both parties have certainty and control over the situation.
The last thing either party will want is to come through this period of uncertainty only to find that the rental obligations are not what you believed them to be.
The difference between an absolute waiver of payment, and a concession deferring payment for several months should be clearly documented.
The same is true of the terms upon which any repayment must be made, as well as the circumstances via which the agreement may be brought to an end.
We can help
Rental concessions are not too costly or time consuming to record. If you have agreed one, are close to doing so, or would like to discuss the best way of going about this then please get in touch.
Landlords: if you have been approached by a tenant in financial difficulty, and aren’t prepared to agree a concession, we can advise you of your options, and whether they are worth pursuing.
Tenants: if you’ve been refused a concession and your landlord has taken – or is about to take – enforcement action against you, we can help you to mitigate the consequences of that.
What’s to come?
There is no way of predicting how things will develop over the coming weeks and months.
However, at a time when we are being encouraged to work together, putting formal measures in place to vary existing rental obligations is something that many landlords and tenants might wish to consider to help one another trade through this unexpected period of uncertainty.
We advise landlords and tenants on all aspects of leases and recommend commercial solutions as the coronavirus crisis unfolds. Get in touch with our Property Disputes team:
0800 923 2064 Email us