The effect of coronavirus on commercial landlords and tenants

This article looks at the effect of coronavirus on both commercial landlords and tenants.

The government has recently announced that the ban on forfeiture (early termination of the lease by the landlord when the tenant is in breach of the lease) for non-payment of rent contained within the Coronavirus Act 2020 will stay in place until 1 January 2021.

Many struggling commercial tenants trying to keep their businesses afloat are breathing a sigh of relief that they have been given more time to try to recover as they rebuild their businesses and keep their staff employed.

It is not such welcome news for commercial landlords, however. They have been unable to take action against their tenants for missing what, for most landlords, is every rent payment date in 2020.

The government’s decision to suspend forfeiture since 26 March 2020 has protected many commercial tenants when they needed it most.

Tenants are doing what they can to try to keep their businesses viable, maintain jobs and keep what lines of work they have, fully serviced. However, many businesses are struggling. They could ultimately fold if they cannot afford to pay rent and are evicted from their premises. With that comes the hit to the economy with another lost business and the sad inevitability of further job losses.

Landlords are also left in a difficult position. If the rent is not paid on time, they have their own commitments such as mortgage repayments, staffing and repair liabilities.

Some bigger landlords with large property portfolios and a wide range of tenants may be in a stronger position to survive the reduction in rental income. However, it will leave smaller corporate landlords and individual landlords in a desperate position. Many do not have the financial reserves to survive. Their rental income is often more than just company profit and could be a family’s main source of income.

It is becoming increasingly common to see tenants request that their new leases now include a rent suspension or rent reduction provision, should there be a resurgence of the virus, or another pandemic.

Our experience

At Brachers, we have been looking after both landlords and tenants by trying to strike a fair balance between the needs of both parties. We have been encouraging both landlords and tenants to try to agree suitable payments between them. The aim of this is to try to keep both parties as financially secure as possible and maintain the landlord and tenant relationship.

Many of our landlord and tenant clients have agreed arrangements where the tenant pays less rent, pays rent on an ad-hoc basis, or pays rent on different dates. Both parties are however in a no-win situation.

Despite all the uncertainty and the economic downturn, some of our commercial landlords and tenant clients have found opportunities during this time. Landlords with warehouse space to let saw an increase in demand as the use of online shopping soared and manufacturing companies began stockpiling in preparation for a surge in demand.

Tenants that have been considering taking leases in new properties have also benefitted from a decrease in demand for new commercial space. Many have negotiated better lease terms than they would have otherwise achieved if there was more competition for the space.

Our guidance for commercial landlords

Although forfeiture has been suspended for now for non-payment of rent, it has not been suspended for other beaches of the lease, for example, failure to repair the property. As frustrating as it is for landlords to be prohibited from taking any action for rent non-payment, we believe that landlords should think carefully before forfeiting the lease when they become able to.

Where tenants genuinely cannot afford to pay rent, the threat of forfeiture isn’t going to assist the landlord in recovering payment. If landlords forfeit leases, they could be left with empty properties and become liable to pay rates. If landlords are not sure whether they can find new tenants quickly then they should balance the non-payment of rent with the prospect of holding an empty property.

Landlords should also check whether they are holding a rent deposit from the tenant that they can draw upon. Also check whether the tenant has a guarantor who could cover the payments.

Our guidance for commercial tenants

Our advice to tenants is to communicate with your landlords as much as you can. Where possible, try to agree and negotiate payment terms that you can realistically stick to. The terms should work for both parties but, importantly, allow you to get your business back on its feet.

Most landlords appreciate that it will be more beneficial for them in the long run to have a tenant whose business has been given the time to return to success and be in a stronger position to pay its rent going forward.

Further support

If you need any advice on the issues covered in this article, please get in touch with our Commercial Property team.

This content is correct at time of publication