Blog - 24/06/2020
Difficulties for landlords and tenants currently negotiating commercial leases
Parties currently looking to agree terms for new lettings face a significant challenge in negotiating provisions to cover the impact of Covid-19. This is due to both the current uncertainty felt by both landlords and tenants, and the potential for further disruption in similar circumstances in the future. In the long term, it is likely that revisions to commercial leases for all types of properties will be agreed in the market. Potentially this will be in conjunction with input from the Government, reminiscent of the establishment of Pool Re in response to the terrorist attack of the 1990s.
This however does not assist parties currently working to agree leases of commercial property where drafts have been circulated with both the Landlord and the Tenant reconsidering their options as a result of Covid-19.
Issues for tenants
Tenants will wish to have clauses that we have seen now being discussed recognising the implications of Covid-19 and the resulting lock down, depending on the nature of their business and the extent of the impact of lockdown on their trading. Tenants will also need to consider the knock-on effects of a forced closure of their properties, which may result in a breach of various tenant lease covenants such as “keep open” clauses and repairing obligations and yielding up at the end of the term when access is prohibited.
Issues for landlords
Landlords with mortgages over their commercial properties will be concerned with their inability to make mortgage payments where Tenants are refusing to pay rent in the knowledge that forfeiture, distraining on goods and serving statutory demands are not a current option. Additional problems posed by lockdown for landlords include potential continuing obligations to provide services in accordance with the lease and an inability to give “quiet enjoyment” of the property to the tenant. Also consideration is needed as to whether rent reviews will need to be amended to assume that the tenant can access the property at all times (thus ignoring the current situation where certain properties have been forcibly closed).
We have already seen a variety of different clauses produced by “high street” tenants covering arrangements for rent suspension during periods of lockdown and/or mandatory social distancing measures. Quite a number of these are unduly tenant friendly. In addition, landlords and tenants are likely to want to include in any new lease a break right to allow both parties to effectively “walk away” if a similar lockdown is imposed in the future.
One potential route to deal with possible future lock downs is insurance. This will be by some form of business interruption cover to cover the losses caused by the impact of Covid-19. However, this cover may in the future be prohibitively expensive, and there is no guarantee that such cover will even be available in the market bearing in mind the experience of the last 3 months. This is unlikely to be known until the outcome of certain cases involving pre-crisis policies.
It is clear that recent developments may have exposed a potential end in the status quo and current market standard practices for commercial leases. It is certainly the case that the more one examines the terms of current lease forms, the more changes that will need to be made to adapt them to cover what has been seen since lockdown started.
If you have any queries about this topic, please contact Clayton Beerman or any member of the Commercial Property team.
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