Commercial rents and business evictions

The government has extended support to prevent business evictions until the end of 2020. This move is welcomed by those renting commercial premises as it will help them weather the financial impact of Covid-19, especially with the fears of a second wave and talk of local and national lockdowns. The government has stated that it has extended protection for commercial tenants until the end of 2020 to help businesses and protect people’s jobs. However, landlords are questioning the cost of the impact of extended support of commercial tenants on them. In this blog we look at the government’s announcement of extended support for commercial tenants.

Landlord and tenant solicitors

If you need legal advice about rent arrears and property possession or any other aspect of landlord and tenant law then the landlord and tenant team at OTS Solicitors can help you. Call us on 0203 959 9123 or complete our online enquiry form for a video conference, Skype or telephone appointment.

The news on Covid-19 and commercial leases

On the 16 September 2020 Communities Secretary and Secretary of state for housing, Robert Jenrick, announced that businesses will be protected from the threat of eviction by their commercial landlords until the end of year in order to provide commercial tenants with security and protect their employee’s jobs.

The government has said that the extension of help for commercial tenants is not a charter to pay no rent and that where businesses can afford to pay their rent then they should do so.

Business Secretary, Alok Sharma, supported the announcement and said:

‘’During this particularly challenging time for businesses, it is crucial that both landlords and tenants have the clarity and reassurance they need to build back better from the pandemic.

Extending the temporary measures we put in place earlier this year to protect businesses from the threat of eviction will give them some much-needed breathing space at a critical moment in the UK’s economic recovery. This extension will protect businesses that are struggling to pay their rent due to the impact of COVID-19 from being evicted and help the thousands of people working in these sectors feel more secure about their jobs’’.

The government announcement indicated that the government will extend the restriction on landlords using commercial rents arrears recovery to obtain unpaid rent on commercial property until the end of the year.

The government suggested solution and guidance is that landlords and tenants should continue to work together to agree rent payment options if tenants are struggling to afford their rent. The government has produced a code of practice to help commercial landlord and tenants resolve rent arrears that are down to the financial impact of Covid-19 on the tenant’s business.

What does the commercial lease code of practice say?

The government code of practice was produced with the assistance of some trade associations to help landlord and tenants to work together to support businesses with commercial leases to ensure that the economy recovers from Covid-19 as swiftly as possible and with as little economic damage and job losses as possible.

The key points in the code of practice are:

• A recognition that every landlord and tenant relationship is different and that landlord and tenants have the right to settle on an arrangement that suits them but that both landlord and tenants should act in good faith, reasonably and flexibly when it comes to any changes in commercial rent payments
• Tenants who need help with rent should be clear with their landlords about why they need help and provide financial information about their business to help the landlord assess the request
• landlords should provide rent concessions if they reasonably can do so after taking into account their fiduciary duties and financial commitments. If a landlord has to refuse a rent reduction request they should be clear about why they are having to take that stance and give a reasonable explanation of their decision
• When assessing a tenant’s request to stop paying or to reduce their rent, landlords should consider the impact of the following issues on the business of the tenant and the landlord:

1. Any closure period of the tenant’s business that has impacted on the tenant’s business, and their ability to trade. For example, whilst the business may have been closed it may not have had a significant negative effect on the tenant because of their ability to trade online or to work remotely
2. The length and the extent of restricted trading due to social distancing measures
3. The additional costs of protecting customers from Covid-19 and complying with social distancing
4. The needs of others , such as employees and suppliers during the period the business is affected by Covid-19
5. Whether the tenant has received any government support and what the support was used for
6. The tenant’s history, if any, of rent arrears
7. The impact of providing support for the tenant on the tenant’s competitors

The code of practice says that if a landlord and tenant agree to a new rental arrangement this should protect the tenant against forfeiture for non-payment of rent under the existing commercial lease and that the variation in rent should be recorded in a written rent payment plan. The concession will last whilst the rent payment plan applies and there is a government moratorium on forfeiture of commercial leases for non-payment of rent.

What are the rent payment options for a commercial landlord and tenant?

The government’s code of practice contains what it describes as a non-exhaustive list of options for a commercial landlord and tenant to agree on, namely:

• A full or partial rent-free period
• A deferral of the whole or part of the rent for an agreed period
• The payment of the rent over shorter payment periods, for example, monthly rather than quarterly to help with the tenant’s cash flow
• Agreement on a rental variation to reduce the rent to a current market rate or to agree that all or some of the rent should be changed so the amount is calculated as a proportion of turnover of the commercial premises, including any closure periods
• landlords using rent deposits to pay their rent but on the proviso that the landlord will not require the tenant to replenish the rent deposit money until they can realistically and reasonably do so
• Agree reductions in rent, or suspension of rent, in other commercial property or units rented by the tenant and owned by the landlord if the tenant rents a portfolio of units
• The landlord waives the contractual default interest on rent paid in arrears or unpaid rents for an agreed period
• The landlord agreeing to split the cost of the rent for any unoccupied period with the tenant
• An agreement on rent made in return for other arrangements, for example, the removal or amendment of a break clause in the lease or an extension of the lease.

Landlord and tenant solicitors say that the above list isn’t definitive and that it is best to take legal advice on the options, if any, that suits your business needs as either a commercial landlord or tenant.

What happens about payment of service and insurance charges?

Obviously, despite Covid-19 and its financial impact it is vital that commercial premises are insured and maintained. The code of practice says that these charges need to be paid in full unless there is a different agreement between landlord and tenant. The code suggests:

• A reduction in service charges if lack of use of a property has lowered the service charge costs
• If the service charge has increased to cover Covid-19 health and safety issues this is considered when looking at rent payments and affordability
• landlords should try to reduce service charge costs if practicable
• Spreading the frequency of tenant service charge payments over shorter periods
• If service charge costs do go down as buildings have been unused then the reduction should be passed on to the tenant to help their cash flow
• Any management fees should reflect the actual work carried out in managing the services and the service charge during Covid-19
• Any agreement reached by a commercial landlord and tenant on the service charge should take account of the RICS Professional Statement Service Charges in Commercial Property, 1st edition and the RICS guidance on service charges and Covid-19.

What should a commercial landlord do when asked to reduce the tenant’s rent?

A commercial landlord is within their legal rights to refuse a request for a rental holiday or a reduction in rent by a tenant. However, if you refuse a request that is supported by financial and other information provided by the tenant then the business may fail and the landlord won't potentially be able to recover the rental arrears or secure a new tenant because of the financial impact of Covid-19.

Online landlord and tenant solicitors

If you need advice about commercial leases and rent arrears or have other questions about landlord and tenant law then the landlord and tenant team at OTS Solicitors can help you.Call us on 0203 959 9123 or complete our online enquiry form. Appointments are available through video conferencing, Skype or by telephone appointment.