Landlords and tenants -a new model of co-operation

The beginning phase of COVID-19 has accelerated the failure of numerous retail stores both chains and single store occupiers.

Phase 2 of the pandemic will see further tenants in distress and increasing numbers of retail shops which will not re-open.

The extension of the furlough scheme to October will undoubtedly be good news to employers and employees but it may also indicate that the Government doesn’t really believe that life will return to normal with retail shops opening in July.

The sad reality is that the longer businesses that rely upon footfall stay shuttered, the less chance there is that those businesses will be able to re-open.

At the time of writing Land Securities, one of our largest commercial Landlords, have stated that only 10 per cent of their office space is occupied.

Transport for London estimates that in order to maintain social distancing for its customers it will only be able to fill its buses, tube carriages and trams to 10% of their capacity.

Government legislation has meant that it is harder to forfeit a commercial lease. In addition the use of CRAR or winding up petitions to try to recover unpaid rent is now, at least in the spirit of recent Government announcements (that haven’t yet been fully legislated for), much more limited. 

What does this mean for the relationship of landlord and tenant and to the shape of the commercial lease going forward?

We believe that Phase 2 of the pandemic will see a number of changes:

1. In the short term, those landlords who engage with their tenants and vice versa will see the fruits of their labour repaid in terms of being paid at least a proportion of say the June quarter’s rent;
2. Again in the short term those who engage with their counterparties will see that their litigation costs reduced (and incidentally their time spent on positive relationship building);
3. In the medium to long term , those retail tenants that survive the pandemic may find that their covenant strength enables them to dictate terms to their landlords;
4. The courts are likely to, where they can (following Government legislation or announcements), to take the side of tenants where they can to prevent forfeiture and business failure;
5. Again in the medium to long term ,commercial leases will change.

Traditional leases have included upward only rent reviews, been for a term of say ten years , included a five year break and in the case of retail shops -partial turnover rents.

What will the leases of the future look like?

Well, that rather depends (and yes as lawyers we would say that), but our view is that we should be looking out for the following –

1. Longer rent free periods- moving from 3 or 6 months to 9 to 12 months;
2. Shorter lease terms of say 5 years , with more frequent tenant only breaks;
3. The introduction of ‘COVID-19’ clauses , allowing the tenant to break the lease if the Government introduce the kind of lockdown we are seeing now ; and
4. An increase in the percentage of the rent which is calculated by reference to turnover so that there is a lower fixed base rent [nil?! in some cases].

What can you do now?

We believe that landlords and tenants should enter into a meaningful dialogue as soon as possible, from experience we know that those who do have a much better chance of agreeing a way forward that will ensure that the tenant stays in the premises for longer and that as much of the investment value of the property as is possible, is retained for the landlord.

If you can agree a way forward which involves varying the terms of your lease then engage your advisors on both sides so that the arrangement can be properly documented.  The law of unintended consequences demands that unless the right legal advice is taken the variation either will not be documented in a legally binding way or the change may result in a surrender and re-grant of the lease which could involve the loss of a guarantor or the payment of additional stamp duty land tax.

Landlords will need to bear in mind however that if their property is mortgaged the consent of their lender will be required for a lease variation.

What we do not know is the reaction that lenders will have to the proposed changes and early engagement with your lender is certainly to be recommended.

For more information please contact your regular Ashfords partner or Rob Nicholson in the Dispute Resolution Team or Philip Turner in the Real Estate Investment team.

The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.

The subject of lease variations is a complex area and no guide to those variation can ever set out all the factors relating to a particular case. This guide is not therefore a substitute for detailed advice on your case. If you would like further explanation of any points in this Guide, please contact us.

The opinions expressed here are those of the writers (and not the opinion of Ashfords LLP its partners or employees) and do not represent legal advice.