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Leasing in the Time of Covid-19

Date: 25/03/2020 | COVID-19, Commercial Property, Dispute Resolution

The last few years have seen a perfect storm of issues arise in the world of commercial letting. Since the financial crisis of 2008, retail has suffered a continuous decline, fewer office spaces are being built and there are less “safe bet” tenants to fill them, and the market for commercial properties has remained volatile. Now, with the unprecedented impacts of Covid-19 on the entire world, these pressures are magnified more than ever. Given that, and given the current uncertainties facing both landlords and tenants, it seemed like a good time to consider what options are available in commercial leases.

Keep Open

Many leases will contain an obligation on the tenant to keep open during certain trading hours. We would expect that these would now have been overtaken by the latest government announcement for all but non-essential stores to close; no matter what the contract might say, no court will grant an order to trade in the current circumstances. Emergency legislation is likely to be forthcoming that will make trading illegal. That will only be temporary and it may be available to landlords to require tenants to comply with their lease obligations at the end of the current restrictions where the tenant is proposing to remain closed.

We would recommend exercising caution before considering any action to force a tenant to comply with their obligations here if there were clear reasons for why they were not willing to trade per the terms of the lease; ongoing public health impacts would certainly be a relevant consideration to any court being asked to force a tenant to trade.

It would be worth reviewing your lease to check the provisions of any keep open clause so that you know what your rights as a landlord, and obligations as a tenant, are. At the very least, if keep open provisions are in your lease, landlords should be communicating with their tenants to note that, whilst it is recognised that the current circumstances prevent trading in terms of the lease, normal business should be resumed as soon as is allowed.

Rent Holidays

Given many shops and restaurants are going to be forced to close, it is likely that some will require rent holidays from their landlords. Landlords will, however, be feeling their own pressures and may be reluctant to agree to these. The operation of the recently announced business reliefs is not yet entirely clear but these may provide some comfort to both landlords and tenants. Where rent holidays are proposed, these should be documented carefully and clear agreements should be reached as to the terms of the rent holiday. If you need guidance on how to document those terms, we would be pleased to assist you.

Landlords may also want to consider what deposits they have in place and whether these should be used to make up any rent shortfall in the meantime. If there are any guarantees from the directors, their use should also be considered with care. Most guarantors, even parent companies, are not likely to be in any better position that the tenants in the current circumstances.

Early discussion between landlords and tenants on any upcoming rent shortfall is encouraged. Landlords may find their lenders are willing to provide relief and tenants may be able to meet some, if not all of the rent in the meantime from other means. The important thing is to carefully record any agreement and set up a way in which any outstanding rent could be provided in due course.

Lease Termination

It may be open to landlords to terminate leases for the non-payment of rent or for permanently vacating any premises. Clearly, care should be taken before exercising this extreme option. The long-term financial outlook of the economy is likely to remain uncertain for some time, even after the current restrictions come to an end, and it may not be easy to find new tenants. Left with an empty building, landlords will be forced to pay rates for any empty premises and leases should be maintained in most circumstances while that is still possible.

If your lease is due to come to an end right now and the tenant is unable to vacate the premises, care should be taken to document any delay in removing as quickly as possible if you want to avoid any arguments about the continuance of the lease.

It’s important to note that the usual laws relating to leases will continue to apply. It will not be open to a landlord to eject a tenant without following the correct procedure provided for in the contract and in statute. Just because a tenant has vacated the premises or failed to pay rent will not automatically afford the landlord any rights to recover possession of the premises. If you are a tenant facing ejection or a landlord considering your options, it’s important that you seek legal advice just as soon as possible.

As will have been seen from the recent incident involving a hotel in the highlands where staff had their contracts for employment and accommodation terminated unilaterally with no notice, the press will be keeping a keen eye on how businesses handle the current crisis. If any option to terminate a lease is being considered, how to handle that in a way that makes it plain that this is being done for clear business reasons will need to be considered.

Sub-letting / Assignation

As with the 2008 financial crisis, it may be that many tenants will seek to exercise options to assign or sub-let their premises. The lease provisions here will be particularly relevant and both landlords and tenants will want to consider what options might be available to reject or receive consent to any requests to sub-let or assign. Landlords will want to ensure that the incoming tenant is financially sound given that some industries will be particularly at risk at the moment. Tenants will want to know how they might satisfy the landlord’s requirements and what obligations they might be able to offer to ensure their exit from the premises. Again, should you have any queries in relation to these matters, we are able to guide both landlords and tenants through this process.

Break Options

Lastly, tenants will want to review any break options that exist in the lease and whether to exercise those. Break options can be a tool to negotiate lower rents and to ensure that the tenant is going to be able to meet their obligations going forward so their use should be carefully considered given the high degree of uncertainty in the future at present. These must be exercised timeously and accurately and obtaining legal advice to ensure that is done is highly recommended. Similarly, landlords on the receiving end of a break notice will want to be clear what options they might have and what the tenant’s obligations are.

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.


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