Covid-19 – Commercial Property in the June quarter
In his numerous press briefings and speeches in Parliament, the Chancellor, Rishi Sunak, has become synonymous with describing our current times as “unprecedented”. With reference to commercial property, this word could not be more apt. From 23 March all non-essential retail stores have been closed. Coupled with the fact that office employees have been asked to work from home, this has left the usually sprawling city centres deserted.
There are many questions arising out of the dramatic but necessary lockdown:-
- How can the landlord/tenant relationship survive?
- How could tenants afford to pay rent if their stores are closed?
- How can landlords service their debts (secured against their properties) or provide income for their families if they are not receiving rents from their tenants?
The Government has scrambled to tread the fine line between protecting tenants without imposing state sponsored restrictions on landlords that would knock the commercial property cycle off kilter. The Coronavirus Act 2020 was rushed through Parliament and this prohibits landlords from forfeiting commercial leases due to lease arrears until, at least, 30 June 2020 whilst similar legislation temporarily prohibits aggressive landlords circumventing the Coronavirus Act 2020 by issuing statutory demands against tenants who are in rental arrears. At the same time, the current legislation acts as a deferment, not as a waiver. Landlords are not being told to waive arrears, just to hold off taking any action until things get better.
Whilst the lockdown and March quarter occurred almost simultaneously, the fast approaching June quarter brings with it a whole set of challenges as we attempt to ease ourselves slowly out of lockdown.
In the last few days, the Government has outlined its plans for non-essential retail stores to open on 15 June and, no doubt, many employers will be beginning to think about bringing some of the workforce back into the offices. However, there is no doubt that this will not be a quick recovery. Footfall (and therefore turnover) for retail stores will be down substantially, not only due to the Covid-19 restrictions that have been put in place, but also due to the time it will take to convince people that it is safe enough to return to the high street. Whilst employers will begin asking employees to return to offices this will be staggered with many employees working from home for the considerable future.
Landlords, who may have given a rent concession (either by deferment or rent free period) during the March quarter will understandably want to see rent being collected, especially as restrictions are eased. Once again, a negotiated balance needs to be struck to protect both parties. No landlord, especially in the current market, wants an empty unit and no tenant wants to have to shutter up and hand back the keys. The below suggestions attempt to strike that balance.
- Share the burden. A reduced 50% rent for the June quarter with the remaining 50% either deferred over the term of the lease or written off may be a temporary step of keeping both parties on an even keel, especially if the tenant is able to increase cashflow through one of the government’s bounce back or business interruption loans.
- Use of Rent Deposits. There may not be a more useful time for the rent deposit than now. With many landlords holding rent deposits equivalent to 3 or 6 months’ rent, draw down in whole or in part by the landlord (with topping up by the tenant either deferred or released) may well provide a vital lifeline in satisfying arrears and ensuring there is some rent flowing through to the landlord without the tenant being required to hand over further monies at this time.
- Turnover Rent. With so much uncertainty over how things will play out over the next few months, it is no surprise that many large tenants are writing to landlords demanding amendments to their leases to make rental payments linked to turnover. Whilst each tenant and each unit is different, landlords (who are historically not keen on turnover rents) may prioritise the certainty that a turnover rent lease provides over the uncertainty of fixed rent lease where the tenant is unable to meet its obligations. Similar suggestions include a temporary, 12 month amendment to a turnover rent, following which both parties will take stock of the situation or an agreement to have a lower fixed rent with a turnover top-up.
- Monthly payments/payments in arrears. Whilst the vast majority of leases require the tenant to pay quarterly payments in advance, for this unprecedented June quarter, landlords may acquiesce to rent paid in arrears when the value of hindsight can be used to determine how the quarter has played out. Similarly, monthly instead of quarterly payments can help tenant cashflow and, as long as a good line of communication is maintained between the parties, it may be the case that rental payments can be negotiated on a month by month basis over the quarter, depending on how the tenant has been able to recover.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.