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Covid-19 and the lockdown measures enforced by the UK Government to tackle it have caused nationwide disruption to commercial businesses. Many commercial tenants are facing tremendous pressure from their landlords to pay their rent.
Section 82 of The Coronavirus Act 2020, which came into force on 25th March, places a moratorium (essentially a ban) on landlords bringing forfeiture proceedings before 30th June 2020. Whilst this prevents landlords from evicting commercial tenants during the next quarter, this does not change the fact that rent will still be due under these commercial leases.
If you are a commercial tenant, the first thing you should do is check your insurance policy to see whether you are covered for any losses you have incurred as a result of Covid-19. However, insurance policies which contain Force Majeure clauses (acts of God) are quite rare; and even if your policy does contain such a clause, you can still expect some resistance from your insurer.
Many landlords have offered some incentives to struggling tenants in respect of the payment of rent. As a commercial tenant, it is extremely important that you are aware of the implications of accepting these proposals. Various clients of ours, both landlords and tenants, have suggested and agreed a variety of different arrangements. Some of these are discussed below:
Using the Rent Deposit- Some landlords have been offering tenants the option of making deductions from the rent deposit that they are holding on behalf of tenants to settle the rent arrears. Whilst this may seem like an attractive proposition at first, most rent deposits are held by landlords under a Rent Deposit Deed and the Deed will require you to top up the deposit following any withdrawal within a short amount of time. Do note that landlords are entitled to withdraw from the rent deposit following any default of the lease, of which non-payment of rent is one. The landlord normally must provide you written notice following any withdrawals and an invoice confirming the amount withdrawn.
Temporary Rent Reduction- In order to ensure continued cash flow, some landlords have offered to temporarily accept reduced rental payments. Some landlords have accepted such payments strictly on the basis that the balance of the discounted rent is later settled at the end of the term of the lease.
Monthly Rental Payments- Your rent most likely is payable quarterly in advance. You may wish to ease the burden on cashflow by making monthly rental payments instead. This will also ensure that the landlord receives some cash flow as opposed to none easing the pressure off you and enabling you to react accordingly with government policies that develop in line with the landscape.
Temporary turn-over based rent- If you landlord is so willing and depending on the viability of your business generating some income despite the lockdown, you could continue to allow your business to trade but the rent you pay will be based on a percentage of the turn-over you generate a month (or whatever period is mutually agreed). This would require you to be completely transparent with your business’ earnings, a level of disclosure which some tenants may not feel comfortable with. You should also carefully consider how you agree and document such an agreement because you may not want this arrangement to become permanent when the lockdown measures are eased and the landlord serves to benefit greatly from turnover rent far exceeding that in your lease.
Your options are not just limited to the above. Depending on your relationship with the landlord and the circumstances surrounding your commercial lease, alternative options can be considered. However, you are strongly advised to obtain legal advice before deciding to commit to a strategy or any proposal a landlord offers. Our dedicated commercial property team have been helping out multiple landlords and tenants negotiate their rental agreements in light of the Coronavirus and should you require any assistance, they will be more than happy to assist.