The Coronavirus Act 2020 (“the Act”) brought in changes affecting commercial leases, effective up between March 26, until June 30.

These changes included a moratorium on forfeiture proceedings in commercial leases and a prohibition on regaining possession of commercial properties where forfeiture proceedings had already commenced prior to 30 June 2020.

As a consequence of the changes brought about by the Act, many landlords have, during this period, agreed temporary rent concessions with their tenants, repayment holidays with their funders and delayed service of schedules of dilapidations on their tenants.

On the basis that the country is now working towards a “new normal”, we need to consider what lasting impact both the Act and the Coronavirus pandemic itself will have upon commercial leases in the future.

As indicated above, one of the new measures brought in by the Act is a temporary prohibition on a landlord’s ability to forfeit a commercial lease due to non-payment of rent by its tenant.

It is noteworthy that the Act does not remove a tenant’s obligation to pay rent during the moratorium, the act provides that tenants are still liable for payments during this period but landlords are prohibited from pursuing forfeiture proceedings as a remedy if a tenant does fail to make rental payments.

Whilst a number of tenants have been genuinely unable to make rental payments during the moratorium period, the Act has inevitably led to a number of tenants simply withholding rental payments in the knowledge that the landlord cannot take steps to evict its tenant.

One of the options available to a landlord during the moratorium has been to draw down on any rent deposit held by a landlord.

It is usually the position that rent deposits are sought by landlords at commencement of commercial leases where the tenant has been unable to prove good covenant strength or where the tenant is a new corporate entity.

The drawing down of rent from a rent deposit during the moratorium has been seen a positive step for both landlords and tenants since, as the tenant has parted with the rent deposit sum at the outset of the lease, neither party’s cash flow is adversely affected (assuming the landlord does not demand that the tenant tops up the rent deposit immediately following a withdrawal).

Moving forward, it is possible that more landlords will seek to request rent deposits at the outset of commercial leases to safeguard against situations such as those currently faced, rather than simply where the tenant has been unable to prove covenant strength.

It is clear that social distancing measures have had an impact upon a landlord’s ability to engage a surveyor to attend its property to prepare a terminal schedule of dilapidations identifying a tenant’s liability for repairs at its property.

An option available to most landlords, in a well drafted commercial lease, is to require a tenant to carry out works of repair and maintenance throughout the duration of the lease and, in some instances, to have an interim schedule of dilapidations prepared and served upon a tenant.

Despite many modern commercial leases providing a landlord with an ability to take action against its tenant for failure to repair during the term of the lease, many landlords simply seek to enforce repairing obligations against their tenants at the end of the term.

This can be a risky strategy as the landlord cannot guarantee the tenant will be present after the lease has ended to attend to repairs nor can it be guaranteed that the tenant has funds to meet any repairing liability.

The pandemic has highlighted these concerns and it is possible that more landlords may seek to control the repairing obligations on their tenants during the lease in future thus avoiding the risks not only of tenant insolvency but also avoiding any difficulties in having experts attend the property to assess its state of repair and condition.

It has become apparent over the last couple of months that rent suspension provisions which usually exist in commercial leases are unlikely to be triggered by a pandemic situation.

Typically, a rent suspension provision is only triggered if the tenant is unable to occupy or access its property due to physical damage or destruction by a risk against which the landlord has insured.

In turn, a landlord is only able to make a claim on its loss of rent insurance if damage has occurred to the property by an insured risk.

In future tenants may wish to see rent suspension provisions specifically include reference to an inability to access premises due to a pandemic and, in turn, landlords may seek to obtain confirmation from their insurers that their loss of rent insurance includes loss of rent as a result of a tenant being unable to trade due to a pandemic.

It is clear that the legislation to deal with the Coronavirus pandemic was only introduced as a temporary measure but the pandemic itself may pave the way for both changes in the way commercial leases are negotiated and how landlords manage their tenants in the future.

Erica Turner
Partner and head of commercial property, Jacksons Law Firm

 

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