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Covid-19 and Commercial Leasing - A Renewed Spirit of Cooperation?3rd July 2020
Most participants in the UK real estate sector will be well-versed in the government’s response to the growing crisis around unpaid rents and service charges under commercial leases. We are calling on landlords and tenants alike to make the most of the extra “breathing room” currently available to them, to engage in meaningful and constructive discussions to agree solutions to deal with the unique challenge of the COVID-19 crisis.
Since we wrote our article “Crunch Time for Business Occupiers” back on 18 March the March and June rent quarter days have been and gone; albeit without the flurry of litigation which might normally follow in the face of significant rent and other arrears. As most participants will well know, landlords have effectively had their hands tied in terms of forfeiture or statutory demand action, due in the main to the restrictions on recovery action described in our later article “More Questions than Answers” on 27 March. Those restrictions, which were due to expire on 30 June, have now been extended by the government to 30 September; beyond the next rent quarter day. Whether the restrictions will be extended further is currently difficult to predict, given the flurry of litigation that will presumably be unleashed as soon as the moratoria are lifted. If the moratoria are lifted in September, many tenants will by that time be up to three full quarters in arrears.
In an effort to minimise unnecessary and avoidable litigation and business risk, however, the government has recently produced a code of practice operative for 12 months until 24 June 2021 designed to encourage both landlords and tenants to seek to resolve their differences over, for example, unpaid rent and service charges outside of any formal arrears recovery process where possible.
Emphasising the need for transparency, openness and reasonable conduct, the code suggests ways in which the parties might seek to resolve matters including: (i) rent deferrals; (ii) rent payment plans for arrears; (iii) ongoing rent payments being made monthly rather than quarterly; (iv) rental reductions or variations with or without the rent being brought up to date later; (v) payments being agreed from rent deposits now with a top-up only when reasonable for the tenant to do so; (vii) service charge payment reductions for the period the premises are not occupied to reflect he likely reduction on cost of such services; and (vii) even completely new lease arrangements.
Since the start of the COVID lockdown, we have been kept busy acting for both landlords and tenants alike to negotiate and document sensible commercial solutions along the lines of those more recently described in the government’s code of practice. We are seeing that open and respectful conversations aimed at reaching a balanced commercial solution palatable to both landlords and tenants (and their respective stakeholders, including shareholders, funders, and other interested parties) are of maximum effectiveness.
In the office leasing market, many landlords and tenants have already agreed monthly (in lieu of quarterly) rent payments; or deferred rents alongside an agreed payment plan. Over and above those basic deals we are seeing an increasing willingness by both landlords and tenants to negotiate in good faith on a variety of deal-types including “bringing forward” future rent free periods; restructuring existing breaks in exchange for immediate support on rent and service charges; and the grant of reversionary leases in recognition of the duration of immediate support on rent and service charges. Each landlord and tenant situation is different, and so we are finding that careful and pragmatic discussions are required to identify a balanced commercial solution. We are supporting clients both in terms of brokering and facilitating the relevant discussions via asset managers and other intermediaries; or alternatively where the dynamics dictate; providing discreet legal and strategic advice “in the background” as landlords and tenants negotiate directly.
In the retail and hospitality sectors, we are seeing a move towards lease extensions for a new agreed rent across an extended term, with or without a new rent free period, with the new rent being calculated by reference to the tenant’s actual revenue or turnover. Turnover rents have had a relatively longstanding role in retail leasing, and we expect to see them used in commercial negotiations even more frequently, especially in the retail and hospitality sectors, and other sectors, as the market looks to adjust to a post-COVID reality.