- 7 mins read
The Covid-19 pandemic has given rise to a wide range of landlord and tenant property issues for business occupiers in the sector. In this feature we reflect on four topical issues, with related practical tips and advice for tenant occupiers to consider and be aware of.
Rent arrears : the moratorium, rental deferments / concessions, and the need for properly documented payment plans
Following consultation, the Government announced on 16 June that the moratorium on forfeiture would be extended to 25 March 2022. The restriction on the use of the Commercial Rent Arrears Recovery process (bailiff action) by landlords has also been extended. However, frustrated by accumulating arrears, and emboldened by recent court judgments in Commerz v TFS Stores Limited  and Bank of New York Mellon (International) Limited v Cine-UK Limited , many landlords in the sector are now likely to take a more bullish approach where there are unresolved, long-outstanding rent arrears.
To quote from the Explanatory Memorandum (2021 No 732) prepared by the Ministry of Housing, Communities and Local Government before the most recent time extension of the current moratorium on the forfeiture of business leases, “The moratorium is not a rent holiday and tenants remain liable for payment of any rent arrears. It protects tenants of commercial leases when many have reduced or no income due to restrictions imposed by the Government to prevent the spread of coronavirus”. Whilst many landlords in the sector have been receptive and willing to agree to payment plans, others have not and it will therefore now be a priority for business tenants to resolve and agree the arrears.
As reported by the British Property Federation, payment plans have been widespread and commonplace. In many cases, however, these agreements have been poorly documented, sometimes with unfortunate and unforeseen consequences. Tenants in the sector may want to check that a permanent concession, rather than a deferment, has been agreed. A well and properly drafted payment plan will be:
- Signed by the correct and fully authorised parties to the lease
- Clear in its terms, with no scope for interpretation issues or misunderstandings
- Typically in the form of a side letter and personal to the parties, with clarity on whether or not the plan will continue to apply in the event of an assignment (or underletting) of the lease
- Confidential to the parties
- From a landlord’s point of view, disregarded on rent review and terminated forthwith in the event of any breach.
Our legal advice and top tip for business tenant occupiers is to ensure that any payment plans are fully and properly documented along the lines set out above. If there are unresolved arrears, renewed efforts should be made to reach an understanding and agreement in relation to payment of the arrears.
Might your property be over rented?
If a lease is “contracted in”, meaning that under the Landlord & Tenant Act 1954 there is a “statutory continuation” of the lease when it expires, the lease and liability for rent will continue when the term of the lease ends unless and until the landlord or business tenant occupier serves (respectively) a Section 25 Notice or Section 26 Request triggering the lease renewal process and related timeline.
Understandably, on account of the pandemic, when some leases have expired many landlords and tenants have allowed a statutory continuation of the lease with a view to reviewing property needs and the terms of any renewal lease at a later date, and to avoid any interruption to care provision or R&D activities. Tenants in the sector may be more reluctant to relocate than business occupiers in other sectors with the disruption and capital costs that any relocation will entail. In this scenario tenant occupiers must appreciate, however, that if the property is “over rented” then unless and until the lease renewal process is triggered it will be impossible for the business tenant occupier to reclaim any excessive rent.
The advice for tenants is therefore to obtain valuation advice on the rent at least 6 months before the contractual term of the lease expires. If that date is now passed, business tenant occupiers should still obtain advice from a valuer ASAP in order to understand the need, or otherwise, to serve a timely Section 26 Request for a new tenancy.
Exercising a break option in order to bring a property lease to an end
Reported cases make clear that break options continue to be one of the most contentious areas in landlord and tenant relationships. Business tenant occupiers should appreciate that, even if historically there has been a good landlord and tenant relationship, things can turn sour very quickly when a break option is exercised, especially if the landlord may be unable to relet the property. Healthcare property landlords may be particularly constrained as to whom they can lease property designed / adapted for use by the sector, and so keen to retain the tenant in occupation and paying rent if at all possible.
Many break options are conditional, for example on payment of rent. This is a further reason to ensure clarity in any payment plans (see above). Break options can be conditional on the delivery up of full vacant possession of the premises, which can be highly contentious if alterations have been carried out. Sometimes reinstatement, repairs, and decoration are required before the break date.
The recent case of Capitol Park Leeds v Global Radio Services (2021) is a timely reminder for business tenant occupiers of the danger in relying on a negotiated surrender rather than following through in full on the requirements and conditionality of the break. In this case the tenant failed to reinstate part of the property, including ceiling grids, lighting, duct work and radiators that had been stripped out, before the break date, hoping to negotiate a financial settlement with its landlord in lieu of these works. The negotiations failed late in the day, leaving insufficient time for the tenant to carry out the reinstatement works. The tenant was fortunate in that after some expensive and protracted litigation on appeal the Court found that the detail of the wording of the lease was such that the non-compliance was on the specific facts of this case immaterial and so the break was in fact effective.
Our advice continues to be that the exercise of any break must be carefully considered and planned for in very good time, and never left until the eleventh hour which more often than not will be too late.
Sharing possession or occupation of leased premises with any other collaborators and business partners operating in the sector
As we move through and out of the pandemic, it is anticipated that many businesses will want to work collaboratively, exploring new opportunities, services, and commercial relationships. In this scenario a question will be whether sharing possession occupation of the premises is permissible on a short, and longer term, basis under the lease?
Inevitably the devil will be in the detail of the drafting of the lease document. This will usually contain so called “alienation” provisions. Invariably tenants will not have an unfettered right to share possession or occupation of the whole, or any part, of their premises. It will be important for occupiers to understand these provisions, and ensure they are not breached. In default a landlord can usually take robust action, and potentially forfeit the lease bringing it to an end with the business disruption that would then arise, or at least demand a payment in return for relaxing the provision.
To quote from a leading case, “the concept of occupation is not a legal term of art, with one single and precise meaning applicable in all circumstances. Its meaning varies according to subject matter”. The point, therefore, is that sharing possession or occupation for even a brief period, for example, handing a set of keys and alarm codes or providing an opportunity to provide specialist services (like a clinic) to a business collaborator, partner, or licensee on even a temporary basis, could very well land the business tenant occupier in difficulties.
Our advice is to understand the flexibility a business requires in terms of future occupation etc before the lease is entered into, or renewed, and to ensure this flexibility is built into the terms of the lease rather than being on the back foot and risking a dispute at a later date.
For more information on the article above please contact Warren Reid