InsightsInsight - Commercial Property - POSTED: April 7 2020
Coronavirus and impact on commercial property transactions
The Government enacted the Coronavirus Act 2020 on 25 March 2020.
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The Coronavirus Act 2020 provides protection against forfeiture of leases for commercial tenants who are in rent arrears or in default of other payments due under their lease.
The right to forfeit will be suspended until 30 June 2020, which will inevitably leave some landlords experiencing cash flow problems in the short-term. However, this may encourage better communication between landlord and tenants going forward, as the current situation forces both sides to urgently agree temporary provisions to protect tenants’ businesses and landlords’ property investments for the longer-term.
Practical advice for landlords and tenants
The purpose of the relevant provisions under the act is to protect tenants who have had to close their business premises or who are now experiencing financial difficulties as a direct result of Covid-19.
The protection against forfeiture proceedings should not be interpreted as a right for tenants to withhold rent or other payments due under their lease until after June, or otherwise take advantage of the current situation.
If you are a tenant facing financial difficulties due to the current situation, we advise that you remain in contact with your landlord and discuss the possibility of a rent concession being granted.
Examples of how landlords can support tenants include: suspending rent until the Government’s restriction on movement rules have been relaxed, reducing rent, permitting the tenant to pay rent monthly instead of quarterly, or suspending interest due on payments. Any agreed rent concession should be recorded in writing and ideally by way of a side letter to the lease or a variation to the lease itself if the rent concession is a longer-term solution for the tenant.
Landlords of multi-let properties need to balance fulfilling their obligations under each lease (for example to provide services) with their obligations under the act, the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 and Public Health England guidance.
There is a consensus that Government statutory obligations will trump contractual obligations. Where landlords cannot provide services because they are legally prohibited from doing so, discussions will need to be had regarding suspending or reducing the service charge payable by the tenants.
We are advising clients to review their existing leases and seek legal advice as soon as possible. In the current climate, particularly where premises are now closed, there may be certain requirements which need to be followed such as notifying insurers and subsequently following their reasonable recommendations in relation to the premises – for example, implementing heightened security measures to protect the premises during extended periods of closure.
Landlords and tenants must also be wary of the address given for receiving notices in their lease or in Land Registry title documents. If your registered office or business premises is locked down or the letterbox sealed (which is a common insurer requirement), you should write to the other party notifying them of a temporary change of address to avoid the possibility of missing important notices being served. Another alternative, if appropriate, is for someone to regularly monitor the post at the premises.
The impact moving forward
The current situation is forcing parties to dissect the lease and parties are seeking to rely on clauses which may not otherwise have ever had to be considered during the lease term. One example is the definition of ‘insured risks’ in leases. Going forward, we predict that tenants may insist on landlords insuring against ‘epidemics’ or ‘pandemics’ and termination clauses may also be widened to permit tenants to terminate the lease in such situations. The current crisis will force legal experts to consider each clause carefully including standard ‘boiler plate’ clauses which can sometimes be overlooked.
When entering into new negotiations to buy or sell, or to grant or take a new lease, we recommend taking initial legal advice at the earliest opportunity and even before the ‘heads of terms’ stage if possible. Traditional ways of drafting and negotiating contracts and leases are becoming redundant due to the way the world and the property market is changing. To keep the property market moving, all parties including agents, will need to take a unified approach and be more flexible when agreeing terms.
The commercial property market and the provision of legal services in this area has been evolving at a rapid rate over the past few years. Traditional ways of working are being eradicated as many people have come to expect lawyers to offer more cost-effective streamlined solutions when providing legal advice. In the short term, the coronavirus pandemic is likely to negatively impact the property market, but in the long term it may encourage a more unified approach to agreeing terms and completing on deals, modernise transactional documents. We also anticipate that the types of deals being agreed between landlords and tenants will continue to evolve as the market moves away from inflexible long-term lettings.
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