1
February
2021

COVID-19: The impact of coronavirus on commercial property leases

Commercial landlords and tenants have definitely suffered in this situation, with both parties stuck between a rock and a hard place. Neither wanting to let the other side down, but also suffering with the financial burden of an empty property.

Nataliya Healey | Partner - Real Estate

The UK is continuing to tackle the challenges caused by the ongoing pandemic. As a law firm specialising in business-related law, we’re regularly receiving enquiries relating to employment law, commercial property and insolvency, amongst other areas. Our clients want to know how we can help them understand the implications for their businesses and recommend the best course of action for them given the constantly changing environment.

The impact on commercial leases

Commercial landlords and tenants have definitely suffered in this situation, with both parties stuck between a rock and a hard place. Neither wanting to let the other side down, but also suffering with the financial burden of an empty property.

The pandemic had a significant effect on various commercial property types – primarily office spaces, hospitality venues and retail outlets.

The imposed lockdown initiated a mass transition to remote working which will, no doubt, affect future requirements for office space once we return to some form of normality or ‘the new normal’. The changes in working methods and wider acceptance of ongoing remote and hybrid working means a degree of down-sizing from large corporates seems inevitable. This is, of course, only where such downsizing is available in commercial leases.

Whilst hospitality venues, such as bars and restaurants, along with many retail stores across the country spent a lot of time closed during 2020 and with no end date to look forward to in 2021, the ramifications can already be seen with many permanent closures, but there’s likely still more to come.

Tenants vs landlords

Landlords are likely to fight tooth and nail to keep current tenants in their properties as in the current climate, what are the chances of them re-letting on similar terms?

The government set up measures to try to protect business tenants and these have been extended along with the various social restrictions. The latest protection, such as against forfeiture is in place until 31 March 2021, an extension from 31 December 2020. This provides protection in respect of non-payment of rent in terms of the landlord treating the lease at an end and taking possession of the premises.

However, the approach taken by landlords varied vastly, with some being understanding and following government guidelines whilst others adopted a more stringent ‘poker face’ approach. Some attempted to go behind the considerations of the government and rely on rent guarantee provisions contained in a separate deed.

Certain clauses within leases were key to helping overcome some of these difficulties, such as establishing whether there was a break clause to enable the tenant to terminate the lease; the permitted use definition and if there was scope to change the use (if viable) to a takeaway from a restaurant / café as an example or, indeed, where there was a permitted use that could not be varied and was subject to government-imposed restrictions, frustration arguments were also put forward. We successfully argued some of these, but they are extremely fact specific.

What will happen to commercial property leases post-COVID?

Going forward it seems logical, and advisable, that there is a greater degree of flexibility in leases, meaning wider ‘permitted use’ clauses, break clauses in favour of the tenant; rent suspension or termination due to the Use Prevention Measure; and landlords offering more flexibility in general due to the ongoing uncertainty for many businesses including temporary rent reductions.

In mid-December the government announced that a review of commercial landlord and tenant legislation will be launched early in 2021. The review will consider a broad range of issues including Part II of the Landlord and Tenant Act 1954, different models of rent payment and the impact of COVID-19 on the market.

It is clear to see that the recent unforeseen circumstances have raised a number of issues and highlighted a number of ‘grey areas’ which we would hope will be ironed out in the not-too-distant future.

 

If you’re looking for any legal advice from either a commercial landlord or tenant perspective, please contact me directly on nataliya.healey@primaslaw.co.uk

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