Will Leases ever be the same again?

The Government is due to publish a Code of Practice to support high street businesses through coronavirus which encourages fair and transparent discussions between landlords and tenants over rental payments during the coronavirus pandemic and guidance on rent arrear payments and treatment of sub-letter and suppliers. By way of reminder the Government has already intervened through the Coronavirus Act, to prevent any business being forced out of their premises if they miss a payment until 30 June. It is anticipated that this date may be extended.

In addition the Government’s Corporate Insolvency and Governance Bill introduced a temporary ban of the use of statutory demands (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. These provisions being in addition to providing Tenants with more breathing space to pay rent by preventing Landlords using Commercial Rent Arrears Recovery unless they are owed 90 days of unpaid rent.

There is little doubt that notwithstanding the contents of the Code of Practice and its implications going forward, the nature of letting documents will change both for Landlords and Tenants certainly in the immediate future. How many Tenants will want to enter into a long term commitment in these uncertain times? The length of Lease terms have dropped generally in recent years. We may now see a raft of short term Leases for a year or less.

In addition to shorter length Leases terms we have seen the introduction of more break clauses to facilitate shorter terms. One could speculate that a Tenant’s break clause in the event of a pandemic may be a fixture in future Leases. Certainly some wording to reflect the fact that Tenants have not been able to end Leases by way of frustration during this current pandemic when they have not been able to access their premises.

With many high street properties sitting empty Tenants will be looking for incentives by way of rent free periods and financial incentives for fitting out. Any Tenant will also be wary of potential hikes in service charges to cater for additional health and safety measures which need to be put in place to keep common parts of shared areas clean and safe. Consequently we may see more service charge caps to counter that increase.

From a Landlords point of view, one cannot help but think that occupancy and income will be their main objective. In addition funders will need to work with their Landlord clients and agree to more lenient terms in the near future to ensure income and servicing of debt. We anticipate that Landlords even institutional Landlords will have to be more accommodating in their lease terms to ensure Leases are agreed quickly.

In any new Leases for longer periods that will be granted, Landlords will need to consider whether there will have to be some changes generally. For example Keep Open Clauses will need to be amended to state they will not apply during a pandemic. There will need to be additional service charge provisions to ensure that the Landlord can recover the costs of the additional cleaning and safeguarding measures that will follow. There may be an amendment to the rent review assumptions that it will be assumed that the Tenant will be able to access and trade from the premises at all time.

We will wait to see whether the Government will attempt to make the Code provisions mandatory even temporarily.  There is little doubt however the pandemic will affect the future of Leases and lettings generally, certainly in the short term and no doubt some changes to letting documentation will remain for the foreseeable future.

If you have any queries about this topic, please contact Joanne McIvor , Clayton Beerman or any member of the Commercial Property team.

 

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