Need to know: Commercial property
Posted on 22/04/2020
By Andrew Halfacree
Where commercial premises are required for the operation of a business there is a cost. Rent, rates, utilities and maintenance.
COVID-19 has forced many businesses to cease operating from their premises for the time being. Many businesses are therefore getting limited benefit from their property, but costs associated with the property continue.
In addition, COVID-19 has had a huge negative impact on productivity, demand for goods and services, and payment of invoices. Many businesses have cash flow issues as a result, as well as not getting benefit from their commercial premises.
My main comments below focus on the payment of rent. This is usually the biggest outgoing related to property and there is usually a commercial relationship between the tenant and the landlord.
The legal position – part one
Most businesses lease their commercial premises and some own their premises. The focus of this article looks at advice for businesses who lease their premises.
The lease is the starting point for the legal position. It is the legally binding contract between the landlord and tenant and should be the first port of call for a tenant – and a landlord – to consider the legal position.
Leases vary from property to property, landlord to landlord, tenant to tenant. Generally speaking they will be for a fixed term, with the rent set out and other costs the tenant is liable to pay and the payment dates. Rent is typically payable quarterly or monthly in advance. Other costs – such as rates, utilities, maintenance – are, typically the tenants responsibility and in addition to rent.
The lease will set out circumstances where rent isn’t payable by the tenant. The majority of leases will not provide for the cessation of rent as a result of a tenant not being able to use a property due to a pandemic. This is mainly because it's an issue that was not considered as a risk to be catered for at the time the lease was granted.
The lease will normally set out the penalty for late payment of rent. Typically this will be a rate of interest charged on the late payment.
The lease should be the starting reference point for a tenant. In most cases it is likely that this will require the tenant to continue to pay rent irrespective of the fact that they are unable to make full use/any use of the property due to the pandemic.
The reality of the situation should then be considered. Can you pay rent? There are three main issues here:
- Do you think your business has a chance of survival? If the answer to this question is no – or unlikely – then, whilst harsh, you would be advised to consider at an early stage whether it is worth even trying to save the business. Walking away sooner rather than later might be the better option.
Assuming you do believe that your business can survive:
2. Do you have enough money to pay the rent that is due now?
3. Do you think you will have enough money to pay rent due in a month's time / a quarter's time?
Some businesses simply won’t have enough money to pay rent due now. Others will have enough money but, if they pay the full rent they owe now, it might hasten the demise of the business or be at the expense of paying other costs.
Whilst it is very difficult to make predictions for your business now, it is important that you try so that you can make some sort of assessment of your ability to pay rent – and other costs – and for how long the business can survive with limited / no income.
Once you have assessed the situation, I would urge you to contact your landlord – or their managing agent where appropriate - and honestly state your position. If you genuinely can’t pay the rent now, tell them. If you can pay rent now but fear it will hasten the demise of your business – tell them.
No two landlords are the same and each landlord will have a different way of responding to the situation. My experience is that responses are ranging from landlords who will simply not tolerate any deviation from the terms of the lease and insist that rent is paid in full on the due dates, to landlords who will exempt their tenant fully from the next rent payment. Most responses fall somewhere in between, with many landlords offering rent deferments, reduced rents, different payment terms.
Remember that most landlords are commercial entities in the same way as your business is. They have their own costs, liabilities, obligations etc. Non payment of rent has the same knock on effect for them as it does for any supplier.
My experience is that most landlords are willing to look at ways to assist tenants who can’t pay, will struggle to pay their rent – if their tenant engages with them and provides an honest picture about the state of their business and the ability to pay. Where tenants don’t engage with their landlord, or where tenants seek to dictate revised terms of payment without consultation, this tends to frustrate landlords such that they will be less willing to consider compromise.
For landlords who won't engage
There will be landlords who simply won’t engage. If this is the case then try every avenue to contact them – phone, mail, email etc. If they still won’t engage then write to them, set out your position and how you intend to deal with payment of rent going forward. Send the letter by recorded delivery and ask for a response. If they still don’t respond then simply proceed with payment of rent as you feel able – having read my comments under the next heading.
The legal position – part two
In normal circumstances, where a tenant doesn’t pay rent in accordance with the terms of their lease (or meet other terms of their lease), a landlord can consider “forfeiture”. Forfeiture allows a landlord to re-enter their property following a breach by their tenant and, by so doing, terminate the lease.
This right has, however, been temporarily suspended by the Coronavirus Act 2020 (CVA 2020). The Act suspends this right for a period of 90 days commencing on 27 March 2020.
The harsh reality for landlords, therefore, is that if a tenant doesn’t pay their rent there is not a lot they can do about it in the short term. But it is important to remember that this is a temporary suspension. It might get extended beyond the current 90 day period but it will come to an end at some point. It is also important to remember that a typical lease will set out penalty clauses on late payment of rent.
So – if a tenant doesn’t pay the rent they are due to pay and where this isn’t agreed with the landlord, it is more likely that the landlord will seek to impose the penalty clauses on late payment of rent or, more severely, seek to enforce their forfeiture rights – when these rights return.
A tenant who hasn’t paid their contracted rent in a situation where this hasn’t been agreed with the landlord can protect against a landlord taking action under forfeiture rights by paying the rent in full just before the last day of the forfeiture exemption period. Whilst this should protect against a landlord seeking possession of the property, it won’t protect against a landlord seeking to impose penalty clauses on late payment of rent where the lease entitles them to do so.
It is important for me to state that I am not legally qualified. Whilst I understand the legal position, you should not rely on the information above and you should take legal advice – where relevant – to verify.
The main purpose of this advice relates to rent where such is payable by a business for the premises they occupy. The next most significant property cost tends to be rates. Rates are a property tax payable to the Government.
There are numerous different landlords and each will have their own personal approach to dealing with tenants in the current crisis. The Government's approach to payment of rates is likely to be consistent to all businesses liable to pay them.
The Government has so far dealt with the rates situation for businesses by exempting certain business sectors / specific businesses from rates. The situation is changing almost daily. Rather than set out the exemptions here – and risking mistake or these being quickly out of date as a result of further measures the Government might take – please access the Government's website here.
In summary I would stress the importance of making the best possible assessment of your business, its short and medium-term future and whether you believe you can survive. Then engage with your landlord – and be honest and direct. Engagement won’t always bring a workable solution – and some landlords won’t engage. But the effort to engage with your landlord – and in an honest manner - will be appreciated by the majority of the landlords and is more likely to bring about a workable solution. And remember that most landlords are businesses in the same way as you are and are a supplier like all other suppliers.