New Commercial Leases after Covid-19 – 5 legal issues to consider
Updated: Feb 8
The Covid-19 pandemic has affected every single aspect of our daily lives. The implementation of lockdown and other restrictions has had a ripple effect from our personal interactions all the way through to our business dealings. No aspect of the UK economy has been left untouched. The effect of lockdown was felt very early in the commercial real estate market. Commercial lease agreements are, usually, long term agreements that run between 3 – 5 years. We have identified 5 key issues which we believe need to be considered when entering into a new commercial lease agreements or seeking to adapt an existing one to take into account the dramatic changes wrought on the economy by the pandemic.
1. Management of Rental obligations
Payment of rental is fundamental to the business relationship. However, many businesses were effectively forced to shut down as part of the lockdown. While the restrictions have been lifted there are still extensive limitations on businesses in their day to day operations. This has had a significant impact on their income which inevitably impacts on their ability to meet their rental obligations.
Under normal conditions, a failure to meet rental obligations would result in cancellation and proceedings to retake possession of property. It is now vital that landlords, together with their legal and financial advisors, consider how to approach this issue other than taking the standard legal route. These measures could include:
· Reducing or suspending rental obligations for a defined period;
· Tying rental obligations to turn-over income;
· Quantifying arrears and agreeing arrangements for their repayment.
2. Keep Open clauses
These are common in commercial lease agreements particularly within the retail sector and require a tenant to operate within certain defined hours. As a matter of law the government imposed lockdown would not be grounds for invoking this clause. However, with the lifting of restrictions, commercial landlords may find that their tenants are reluctant to re-open their businesses due to personal health risks or difficulties in managing the post-lockdown regulations affecting their business. In negotiating with tenants reluctant to open the landlord should keep in mind the following:
· Uniformity in respect of all tenants. If a landlord has a number of retail spaces it should take care to ensure that it has, as far as possible, the same policy in respect of keep open obligations towards all tenants;
· Shuttered retail spaces can create a poor impression and may impact on the businesses of other tenants of the retail space;
· Tenants must be made aware that any concessions regarding the keep open clauses will no longer operate when the Covid-19 restrictions are eventually lifted.
3. Insurance – is there a claim?
Your existing business interruption and other insurance polices should be scrutinised carefully to establish whether your business has a claim and to ensure that the claim is lodged correctly within the prescribed time periods. It may well be that while not all of your losses are covered there may be a modicum of financial relief due to you in terms of a policy. Commercial landlords should encourage their tenants to undertake the same exercise. In respect of future agreements, the insurance market may have developed business interruption products tailored to events like the pandemic. It may be in all parties’ interests to investigate whether a clause requiring one or both parties to take out insurance should be inserted in the agreement.
4. Maintenance requirements – deep cleaning now mandatory?
In some commercial lease arrangements cleaning of the premises forms part of the obligations of either the tenant or the landlord. In the post Covid-19 world “cleaning” means a great deal more than simply maintaining the premises in a hygienic condition. There are products and specialist cleaning companies which can provide anti-viral cleaning services often known as “deep cleaning”. As these are specialist services they will attract a higher cost. When negotiating the parties should consider the following issues:
· An appropriate benchmark for “deep cleaning” this can range from changing the products used from ordinary cleansers to specialist anti-viral ones;
· How the premises’ cleaning schedule should change and the extent of the cleaning undertaken;
· How the increased costs will be apportioned between landlord and tenant;
5. Drawing down from deposits – a short term solution with long term consequences
It may seem logical for landlords to draw down on existing deposits to assist struggling tenants to meet their rental obligations and to maintain the landlord’s cashflow. However, the deposit is not only used to cover rental arrears. Deposits are also used to cover damage to the premises and to cover any outstanding bills (such as council tax or electricity) which the tenant may owe after departure. In negotiating the possible use of a deposit money to cover rental the following should be considered:
· Whether there any other charges outstanding which may need to be satisfied from a deposit?
· Whether it is necessary to cover the entire rental obligation from a deposit or merely a portion?
· How the deposit is to be topped up once the tenant’s cashflow is has returned to normal.
Covid-19 – the best approach
The UK government has published the “Code of Practice for commercial property relationships during the COVID-19 pandemic”. This is a guidance document and does not alter the law in any way. It emphasises the importance of landlords and tenants working together to weather the economic storm caused by the pandemic. Its suggestion can be boiled down to transparency, collaboration and a unified approach. While voluntary, the guidance has been endorsed by leading interest groups such as the British Chamber of Commerce and the British Property Federation.
However, as a matter of general principle:
· a landlord or tenant seeking to renegotiate any aspect of the terms of an existing commercial arrangement should take independent legal advice;
· Any variation to an existing obligation should be reduced to writing and signed by all parties;
· Agreements for the top up of deposit monies or the repayment of rental arrears should be reduced to writing and signed by all parties.
This article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you require specific legal advice on any issue relating to a commercial lease agreement or a landlord/tenant relationship, Stanley Beckett will be able to assist. Please contact him on 0800 019 7773 to arrange a free 15 minute consultation by clicking here