'Landlords and tenants need to work together' says commercial property solicitor

These are challenging times indeed for businesses with leased premises, whether they are the landlord or the tenant. As many landlords and tenants work together to find short term solutions, senior commercial property solicitor Abigail Mitchell from Switalskis shares her advice on negotiating temporary lease arrangements.

For tenants, the immediate concern has been the ability (or otherwise) to trade, and the uncertainty around when they will be able to open up again. The temporary abolition of business rates for the coming year for properties with a rateable value of less than £51,000 provides tenants with some much-needed breathing space, but many still find themselves with no option other than drastic cost cutting measures – including non-payment of rent – to try and ensure their future survival.

The Government has passed legislation to provide a safeguard against the eviction of commercial tenants, which means that landlords cannot take action to re-enter premises and “forfeit” commercial lease arrangements for non-payment of rent. They are also temporarily unable to issue statutory demands and winding up petitions against commercial tenants who are unable to pay their bills due to Covid-19. These “bans” will operate until end of June but could be extended. This has left many landlords with immediate cashflow challenges where they themselves have loans or mortgages to pay.

Many tenants have taken advantage of the Coronavirus Job Retention Scheme and furloughed staff while their premises are closed. To help further with cost cutting measures, they are turning to their landlords to negotiate rental holidays or a rent-free period.

We are seeing a marked difference in levels of collaboration and cooperation among smaller and big businesses. A landlord with a large commercial portfolio collected only 10% of the rents due for the last rent quarter. We are seeing many large national retailers adopting a policy of stopping rent payments without any repayment proposals being put forward.

Within the SME sector, we are seeing much higher levels of cooperation, with many landlords willing to work with their tenants to weather the storm. The options being discussed at present include short rent-free periods; rental holidays; discounted rent for an agreed period; service charge holidays; replacing quarterly payments with monthly payments to support cashflow; and lease term extensions to help ensure landlords receive payment for any non-payment period.

By working together, landlords and tenants will often come up with the solutions that work best for them.

Here’s our advice if you are negotiating new temporary arrangements in relation to a commercial lease:

Seek advice on additional grounds which link into any concessionary arrangements, such as:

  • Will the concession be personal to the tenant?
  • How long will the arrangements last?
  • If you are considering a rent deferment – where the obligation to pay rent remains in place, but a payment plan is agreed – will interest be payable on rent paid? If so, when will payments be due, and at what rate?
  • Can other existing security, such as a rent deposit taken at the beginning of the lease, be used to offset against any payments due under the lease?

Consider the position of any existing guarantors on the lease: It is common for a commercial lease to have a guarantor if the tenant is a company that will stand in the tenant’s place and take on the lease obligations if the tenant defaults. Make sure the guarantor is aware of the concessionary arrangements, as they should be party to any agreements made.

Take care to make sure that concessionary agreements do not inadvertently impact other lease terms, such as break clauses, rent reviews or lease renewals.

It’s important that any concessionary arrangements you agree are effectively documented. This may include preparing side letters or formal deeds of variation. Speak to your legal advisers, who will help you prepare documents that are satisfactory for all involved.