Commercial property leases and rent payment difficulties – here’s what you need to know

News Article

The commercial property industry has been drastically affected by the economic effects of the coronavirus pandemic.

The rules relating to commercial leases have changed temporarily, in a bid to support businesses that are struggling.

This, in turn creates uncertainties for commercial landlords and property management firms.

Here, Maisie Yau, an Associate Solicitor and Commercial Property expert, explains how the sector is affected and how the rules have changed in recent weeks.

Are tenants able to stop rent payments or opt to end their lease? 

Considering the extreme financial strain that many businesses are experiencing many tenants are beginning to refuse to pay rent, ask for a reduction in rent or are seeking to terminate their lease early.

Whether a tenant can do this and on what grounds will vary from one lease to the next, depending on what was agreed under the original terms of the lease.

Most leases provide for rent to be payable without deduction, meaning that tenants will not be able to withhold rent because of COVID-19, unless any specific lease provisions allow them to do so. Meanwhile, rent suspension clauses generally only relate to where a property is damaged or lost altogether due to destruction.

The common law doctrine of frustration may come in to play when it comes to terminating a lease. Tenants may try to prove that there is some form of illegality or failure of common purpose that renders performance of the lease/contract impossible or so radically different from the parties’ expectations and that termination is therefore justified.

This approach is yet to be thoroughly tested via the courts and it is not clear whether the narrow definition of frustration applies to a commercial lease. A court is not likely to relieve a tenant of their contractual obligations as the bar set for such a claim is very high.

Is it possible to evict a tenant who is no longer paying rent?

The Government’s Coronavirus Act 2020 (the Act), introduced new measures to protect commercial tenants. Section 82 of the Act bans the forfeiture of commercial leases until 30 June 2020 for non-payment of rent due to COVID-19, thus preventing evictions.

It is not yet clear whether the Government intends to extend this period further, but it has indicated it may depend on the requirements of the lockdown period.

Does this legislation also apply to squatters?

No, this legislation is designed solely for existing tenants. If you have trespassers or squatters in your property you can still undertake a repossession order under the existing rules.

Do rental arrears still need to be repaid?

Yes – despite the Government’s move to prevent evictions from commercial premises, rent arrears will still accrue and are expected to be repaid in future.  In some cases, this may be by agreement between a landlord and tenant, but in other cases, landlords may be required to seek debt recovery procedures to recover rent that is owed (be aware that some procedures have been temporarily banned). Before taking either step it is recommended that you seek legal advice.

What about debt recovery steps such as a statutory demand?

The Government has temporarily banned the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions presented from Monday 27 April, through to 30 June, where a company cannot pay its bills due to coronavirus. This will help ensure these companies do not fall into deeper financial difficulty.

The Government is also introducing new legislation to provide tenants with more breathing space to pay rent by preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent.

However, the Government has made it clear that tenants shouldn’t use this as an opportunity to avoid paying or delaying a rent payment if they are not significantly affected by COVID-19.

Most standard commercial leases include an obligation on the tenant to comply with all statutes and notices or orders made by competent authorities, which means that they would be in breach of that covenant if they fail to comply the Government’s current COVID-19 directions.

Landlords also must comply with this and it is why you should try to work with tenants to come to a suitable arrangement.

Therefore, in the first instance, it is advised that you seek legal advice before opening up a dialogue with your tenant. Once you have taken appropriate legal advice you may wish to come to an agreement with your tenant over current and future rent payments. Depending on your own needs it may be possible to agree on how the rent will be paid in future, including a method for making up rent arrears.

If you have any other questions regarding commercial property matters, please get in touch with our team.

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