Where does my business stand regarding commercial lease rent payments during Covid-19?
These are strange and daunting times for many businesses, and with no guidance as to how long this matter will carry on for it is obvious that many businesses are going to be concerned as to the future.
The government have taken steps to put various schemes in place to assist businesses, the self-employed and employees, but where does this leave a business having to pay rent under a commercial lease?
With many businesses renting one or more buildings in order to operate their business from, the sums required to cover these costs will no doubt form a large chunk of the regular payments going out of the business coffers. As a commercial lease is very often an agreement with a private landlord, it is important to understand your rights and any protection mechanisms available including these uncertain times.
This guidance aims to set out clear and succinct advice as to the current position and your options. These are however complex matters and you should always seek advice before acting, this guidance is not full and complete legal advice and should only be used as general advice in the first instance.
What if my business can’t pay the commercial rent?
The Coronavirus Act 2020 received Royal Assent on 25 March 2020. Including in this Act is protection for business tenancies in relation to forfeiture (i.e. termination of the lease by the landlord). Section 82 covers businesses in England and Wales and Section 83 covers businesses in Northern Ireland. This article will focus on the position for businesses based in England and Wales.
Section 82 of the Coronavirus Act states:
(1) A right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period.
The relevant period in the Act is defined as the day after the Act was passed until 30 June 2020, or any such later date as may be specified by the relevant national authority (a power which may be exercised on more than one occasion to further extend the period).
This means that there are steps in place to prevent landlords of commercial tenants evicting their tenants for unpaid rent during these uncertain times. It is important to note however that these rents will still be due, and once the relevant period comes to an end, currently 30 June 2020 but may be extended, that the risk to commercial tenants with unpaid rents will resurface.
What should I do if my business can’s pay the rent or may not be able to in the future?
Communication is always the key.
If you’re unable to pay your rent, or you feel that in the coming months that the business will be unable to pay its rent then it is advisable to raise this with the landlord directly at the earliest opportunity to see if you can reach an agreement.
Many businesses pay rent on a quarterly basis, however if this is too difficult in the current climate you could raise suggestions of paying rent on a monthly basis. You may also be able to agree delayed payment, or even see if the landlord is willing to take on some of the burden by agreeing some form of rent reduction. If any form of rent reduction is agreed, this should be carried out by way of a side-letter, and it is important to ensure that this is set out in the correct format.
How your landlord will react will differ on a case by case basis, however the government has called upon all parties to work together at these difficult times. It is important to be aware that Landlord’s themselves have their own financial obligations to comply with, so they may not be able to provide you with an answer straight away, however where the parties can reach some form of co-operation, this makes commercial sense all round.
Check your lease.
Each lease will be different, but you should check your lease to see if there are any restrictions or implications as a result of the current position.
It is not unusual for a lease to require a certain element of occupation at the premises. Whilst there may be an exemption during a government order, this would not necessarily be automatic and you may need to put your landlord on notice if there are requirements to do so in your lease. You may also need to notify insurance companies depending upon the terms of your insurance.
Exercising a break clause
In many business leases it will state that if you wish to exercise a break clause that it is a requirement that all rent is currently up-to-date and paid in order for the break clause to stand. If the business wishes to exercise a break clause, but has rent outstanding, you may wish to contact the landlord and see if an agreement can be reached or if a payment plan can be agreed. The business may well have paid over a deposit, however the landlord will not be keen for this to be used initially and may be keen to inspect the premises to assess it is been any damage or issues throughout the term of the lease.
Termination of a lease
The lease will normally set out the steps required in order to terminate the lease, however you cannot normally terminate the lease partway through an agreed term. The lease may well include a force majeure clause, however you should check this carefully to understand if the current position is included in the definitions.
It is not unusual for a lease to contain clauses which state that the lease will terminate in certain circumstances. These often include situations where the business or those running the business fall into financial difficulty including insolvency and bankruptcy. Whilst landlords are not able to effect a right of re-entry or forfeiture/ termination of commercial leases at this present time, once the relevant period comes to an end landlords will no doubt start considering their positions.
It is important to understand whether your lease contains a personal guarantee. A personal guarantee will state that should the business not be able to pay any rents in accordance with the lease agreement, that a personal guarantee(s) will personally guarantee that any sums due under the lease will be paid. Whilst court actions are heavily restricted at this time, this could have huge implications after the relevant period comes to an end and therefore it is vitally important that you understand the full implication of any risks as soon as possible.
At these difficult times it is always incredibly important to seek advice in order to understand what impact any action could have on you and your business moving forward. If you need any advice or assistance Altion Law will be more than happy to assist you.
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