Coronavirus (COVID 19) Impact on Business Tenancy

 

27 April 2020

 

Mahadi Hassan

Partner and Head of Commercial Property Department at VB LLP, Surrey, UK MBA I Post Graduate Diploma in Legal Practice (Bar) I LL.B (Hons)

Almost all commercial properties are affected by the outbreak of COVID 19, commonly known as Coronavirus. Retail business owners and tenants find themselves in a very difficult position that they have to keep their business closed (grocery, pharmacy and other essential businesses are exempted) during the Government imposed lockdown. They are worried about health and safety risks as Coronavirus is highly contagious. On the other hand landlords are facing rent arrears and ban on enforcement against the forfeiture. These unprecedented circumstances created a lot of confusion in relation to the recent Government policy tackling the pandemic. This article attempts to clarify the main concerns in brief.

Closing Business Premises

Some lease agreements have provisions which require the tenant to keep their business premises open and the shop window well lit and dressed during standard hours and business days.

However, the tenants will rely upon the ‘compliance with law’ provisions of the lease agreement, which requires the tenant to comply with the relevant laws especially where closure is enforced by the Government. Furthermore, the tenants have a duty to ensure health and safety for the members of staff and the customers who visit their premises.

Rent Suspension
If my business remains closed due to the Coronavirus outbreak, do I still need to pay rent?
Yes, you still need to pay rent. The Act does not waive the rent unless your landlord expressly waived the rent in writing. You should continue to pay rent where possible and try to discuss with your landlord if you are in difficulty. You should also seek the Government hardship fund if necessary.

Turnover Rent Lease Agreements

In some turnover rent leases, tenants may face ‘penalties’ for not keeping the business open and tenants are liable to pay base rent plus turn over rent calculated on average business turnover in the immediate past years. It will be very difficult for the tenant to bear the burden of such rent since their revenue stream will dry up and it will take considerable time before things return to business as usual. Under such circumstances, tenants will rely on the ‘compliance with law' provisions of the lease.

Protection from Forfeiture for Rent Nonpayment

Can a landlord forfeit the lease for rent arrears?

Exercise of Right Re-Entry or Forfeiture for non-payment of rent is a common feature of any leases; however, the Coronavirus Act 2020 (‘the Act’) introduced a ban on forfeiture for non-payment of rent by commercial tenants until 30 June 2020. Rent extends not only to annual rent but also includes any sum which a tenant is liable to pay under the lease including insurance, service charge and interest.

Options to Recover Rent Arrears

The Act prohibits forfeiture by the court during the relevant period but makes no restrictions on the pursuit of other landlord's remedies for the recovery of rent, such as a pursuing an existing guarantor (including any liable under an Authorised Guarantee Agreement), or withdrawal from a rent deposit, statutory demand and winding up petitions, and taking control of tenant’s assets on the premises under the Commercial Rent Arrears Recovery (CRAR) procedure. The landlord can recover interest accrued on the rent arrears over the period of moratorium.

However, recently landlords are prohibited by the government until 30 June 2020 from

“aggressive rent collection” during the coronavirus crisis. Landlords should not send

their tenants statutory demands, a formal request for payment or winding-up petitions.

Converting to Takeaway

Planning rules have been relaxed so pubs, restaurants and cafes can operate as hot food takeaways during the coronavirus outbreak. This is subject to conditions that the local planning authority must be notified and the property must revert to its previous lawful use at the end of the relevant period.

Business Rates Holiday

The Government has announced that retail, leisure, hospitality, estate and letting agents, bingo halls and nursery business will have 100% relief for the financial year of 2020-2021.

However, following businesses are not eligible for rates holiday:
1. Financial services (e.g. banks, building societies, cash points, bureaux de change, short-term loan providers)
2. Medical services (e.g. vets, dentists, doctors, osteopaths, chiropractors)
3. Professional services (e.g. solicitors, accountants, insurance agents/ financial advisers)
4. Post office sorting offices

How do I get Business Rates payment holiday?

You do not need to take any action to take advantage of any of the above forms of relief related to business rates. Your local authority will automatically apply the relief to your bill or write to you concerning eligibility for a grant.

Insurance

Tenants should carefully review their own insurance policy whether it covers business interruption and check the landlord’s building insurance policy whether it covers pandemic. Landlords and tenants should also pay particular attention to the rent suspension clause in the lease (if there is any) whether it is limited to damage and destruction by insured risk only or it also includes situations when the property becomes unfit for occupation or access. Some leases require the landlord to insure the loss of rent for up to 3 years. If landlords have insured the loss of rent, they should notify their insurer of potential claims before taking any steps to agree on rent concession or other arrangements with tenants.

Compliance with the Health & Safety Regulations

Coronavirus outbreak is a health risk. Both tenants and landlords are responsible to remain compliant with the relevant health and safety regulations in relation to the property. If a landlord has granted a long lease of part of the building and retained ongoing maintenance or services obligations towards the tenant, then he has obligations to maintain health and safety for the common parts and service media. After the lockdown is lifted, most of the businesses will have to take necessary precautions to disinfect their property and ensure the property is safe to use and occupy. Please consult with the HSE guideline concerning Coronavirus outbreak for more information.

Force Majeure, Illegality & Frustration

Can a tenant terminate the lease for Coronavirus?

If a tenant finds the lease impossible to perform because of the Coronavirus outbreak, then he may claim that the lease has been frustrated and should be brought to an end. However, the success of such a claim will depend on various factors; for example, the length of the lockdown. Recently, in the case between Canary Wharf and the European Medicines Agency (EMA), the tenant claimed that Brexit would frustrate its lease on the grounds of supervening illegality or frustration of common purpose because, as an EU institution it was unable to operate outside the EU. However, the Court held that UK law does not prevent tenants from performing its obligations under the lease and the premises remained capable of occupation.

Some lease agreements may have force majeure provisions, but if it is not incorporated in the lease agreement, then in English law it is not accepted as implied. If there are express force majeure provisions in the lease, then the burden of proof rests upon the party who is claiming it. The claimant has to prove that the force majeure event has occurred, it has a causal link with non-performance, and the claimant has used all reasonable endeavours to mitigate its loss and appropriate notice has been given to the other party. If the party is successful in doing so, the lease agreement would be frustrated in common law. However, this is not the ideal route due to expensive and time-consuming litigation, which should be the last resort in any event. The tenant should try to surrender the lease by an agreement with the landlord.

Practical Tips

Landlords and tenants have to cooperate with each other to find an amicable, fair and reasonable outcome as we are all in the same boat. Empty property under the current economic climate is the last thing a landlord wants. No tenant wants to let go of its livelihood. Parties may consider the following options:

●  Monthly rent payment rather than quarterly

●  Spread this and next quarter’s rent over the next 12 months

●  Suspension of rent until the Government lockdown is lifted

●  Rent reduction for the next quarter

●  Seek Government hardship fund where available

●  Consult with your insurer concerning property and business continuity

●  Inform the relevant authority if you believe the property needs to be disinfected

●  Avoid conflict and try to resolve amicably as we are all affected by this pandemic

Landlords and tenants should seek formal legal advice before taking any step to ensure the agreement is enforceable and legally binding.

Government Grants

In addition to the business rates holiday for year 2020-21, Local Authorities will also provide cash grants for small businesses as well as businesses in the retail, hospitality and leisure sector. The Government has introduced two grant schemes:

1. theSmallBusinessGrantFund(SBGF);and
2. theRetail,HospitalityandLeisureGrantFund(RHLG)

Subject to some exclusions, the SBGF is available to all businesses eligible for relief under the business rate Small Business Rate Relief Scheme (including those with a Rateable Value between £12,000 and £15,000). The available grant amount is £10,000 per property.

The second scheme RHLG is available for businesses in England in receipt of the Expanded Retail Discount (which covers retail, hospitality and leisure) with a rateable value of less than £51,000. Under this scheme - £10,000 grant is for premises with a rateable value of up to £15,000 and £25,000 grant for premises with a rateable value of over £15,000 and less than £51,000.

You should receive correspondence from your local authority in relation to the grant, if not you need to contact them.

Further guidance & links

  • Business Support

https://www.businesssupport.gov.uk/

  • Guidance for employers and businesses on coronavirus

https://www.gov.uk/government/publications/guidance-to-employers-and- businesses-about-covid-19/guidance-for-employers-and-businesses-on-coronavirus- covid-19

  • Financial support for businesses during coronavirus

https://www.gov.uk/government/collections/financial-support-for-businesses-

during-coronavirus-covid-19

  • Guidance for employees

https://www.gov.uk/government/publications/guidance-to-employers-and-

businesses-about-covid-19/covid-19-guidance-for-employees

  • Regulating occupational health and safety during the coronavirus outbreak

https://www.hse.gov.uk/news/hse-regulatory-activity-during-coronavirus.htm

 

For further information please contact:

Mahadi Hassan

Partner

Vivash Brand LLP

Disclaimer: This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Relevant laws may be subject to change.

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