As business owners and landlords struggle to navigate their legal obligations amid the current coronavirus crisis leading law firm Aaron & Partners has put together a list of four tips aimed to help them maintain the relationship.
Joseph Fletcher-Hunt, a Solicitor in the firm’s Real Estate team, works closely with clients across the UK to provide straightforward and pragmatic advice on a wide range of real estate and property matters.
Joseph said: “The coronavirus has caused issues in all areas of business, and many business owners have raised the question of what to do with rented properties and facilities. Many tenants have found themselves or their staff furloughed with less cash to make rental payments, leaving them needing to find resolutions in highly unfamiliar circumstances.
“Although tenants may not be able to afford rent in some cases, legally this alone is not reason enough to pause their lease obligations and withhold payment. However, Landlords cannot simply evict for non-payment, as the Government has restricted a landlord’s right to forfeit a lease until at least the 30th June.
The problems facing business owners, and their complex nature in these uncertain times, mean the tenant and landlord must work together to find a solution. To offer some help and guidance, we’ve produced a list of top tips to help business owners navigate this period.”
Explore rent holiday and concession options
Rent holidays have been highlighted as an option for many tenants during the Covid-19 crisis, and whilst The Government has granted a three-month rent holiday for those struggling to pay, this option should be discussed with the landlord before any action is taken.
Both parties should assess what they can afford, and what they can offer to each other. During this negotiation, striking a balance is important. For example, if a landlord agrees to lose out on rent in the short term, tenants should consider a long term incentive, such as a lease extension, extra obligations, or losing some benefits like additional facility use.
The solution could be as simple as relaxing payment dates from quarterly to monthly, or suspending additional payments like turnover rent provisions, which are commonly found in a retail lease. Large retailers have also been seeking rent holidays, with the in-administration restaurant chain Carluccio’s asking for a three month suspension from its landlords.
Whatever agreement is reached, it must be done with an open discussion carried out as soon as possible, and formally documented in writing. Landlords must also review their obligations to banks and lenders before agreeing to new terms with a tenant.
Deal with upcoming rent reviews
Lots of leases will have a rent review date, or lease termination break, in the near future or even during the current crisis. This could cause added stress for the landlord and tenant, but it is standard practice for this date to drafted as ‘time is not of the essence’ in a contract, allowing for flexibility.
This clause usually provides more time to obtain and review valuation advice, negotiate and in some cases mediate. However, providing the situation on current passing rent is understood, landlords may wish to defer upcoming reviews and breaks until the coronavirus restrictions are lifted.
Seek to limit service and insurance charges
In some instances, it may be possible for a landlord to reduce or freeze additional costs, which often come in the form of service charges or insurance premiums. These are usually payable under the lease, with most of the costs being passed on proportionally to the tenant.
Seeking to reduce or pause these costs will help both parties with payments elsewhere, but the landlord may find they are negotiated and set on an annual basis, making it difficult to try and alter them until the date for review comes up.
Landlords and tenants should also check their business interruption insurance, which could include costs and rent protection. This varies across many policies, so should be reviewed on a case-by-case basis.
Discuss rent security and guarantees
Some landlords will have additional forms of security on their agreements from tenants, such as guarantors. Landlords are entitled to approach guarantors for assistance with arrears, costs, expenses and interest.
They may have the option of withdrawing funds from rent deposits to cover arrears and outstanding payments, leaving the obligation on tenants to ‘top-up’ the withdrawn fund. However, landlords could use the deposit to assist a tenant’s cash flow by deferring or waiving their obligation to repay the withdrawn amount.
This could work as a short term solution, but the parties need to consider the possibility of the deposit running out, as well as the viability of the tenant being able to repay at a later date.
Landlords and business tenants concerned about their situation should contact their agent or solicitor at the earliest opportunity to discuss their options and the next practical steps.