Protecting your commercial property lease during unprecedented times

Pinchinthorpe Hall

Expert commercial property legal advice from Jacksons Law Firm solicitor Rebecca Webster…

The impact of the Covid-19 pandemic has undoubtedly changed the way we live and how businesses operate.

Recent government restrictions meant the complete closure of certain business premises and a dramatic reduction in footfall in towns and cities that no one could have predicted, so how can landlords and tenants protect themselves going forward?

The majority of UK leases reflect the institutional landlords’ preferred lease which incorporates a fixed duration, fixed rent with upward-only rent reviews and rents payable quarterly in advance.

The pressures on the property market caused by lockdowns have caused many to question whether this model is sustainable and how it might be varied to suit both landlords and tenants, particularly in sectors such as retail, hospitality and leisure.

The Ministry of Housing Communities and Local Government published a voluntary Code of Practice for commercial property relationships during the Covid 19 pandemic.

The code includes a list of principles to be respected such as transparency, collaboration, and acting reasonably and responsibly and promotes a collaborative approach between landlords and tenants to find temporary and sustainable arrangements.

It also outlines potential arrangements between the parties of existing leases such as the deferral of rent, reductions in rent, the waiver of contractual default interest on unpaid rent or potential lease surrenders.

Although we are hopefully reaching the light at the end of the tunnel with coronavirus restrictions, in the road to recovery it is now likely that parties intending to enter into new commercial lease transactions will consider whether bespoke provisions are appropriate to address the various issues that have been brought about by the pandemic.

Landlords will wish to protect the value of their assets and maintain a reliable income stream to satisfy their obligations to lenders or provide a good return to their investors.

Landlords are not however insensitive to the impact of the coronavirus crisis on tenants and will wish to avoid vacant units.

Terminating a commercial lease means the landlord takes on additional costs and uncertainties regarding re-letting risks.

Both parties therefore will have incentives to negotiate their lease terms. Generally, tenants are likely to look for greater flexibility in order to make their business more agile in times of crisis, perhaps seeking:

• Shorter term leases;
• Increased opportunities to terminate by incorporating rolling breaks, or break options triggered by particular circumstances, such as a further national or local lockdown;
• Rental concessions triggered in periods where operation of their business or access to the premises is restricted;
• A change in rent payment to monthly rather than quarterly in order to assist with cash flow;
• Turnover rents which may assist in sharing the burden of the government restrictions between both parties. The tenant will pay a percentage of turnover to the landlord rather than a fixed rent.

The commercial property team at Jacksons assists both landlord and tenants whether they are looking to vary, renew or surrender their existing lease or are looking to enter into a new lease.

Rebecca Webster
Commercial property solicitor, Jacksons Law Firm