Fire, Flood but not Pestilence in Commercial Leases

How has Covid Affected Commercial Property?

It’s no secret that the past year has had a detrimental impact on the commercial property sector, especially in retail and hospitality. With businesses forced to close their doors, both tenants and landlords of commercial properties were left out of pocket, as many business owners were unable to pay their rent. While the government has introduced a number of restrictions in an attempt to curb the impact of the pandemic on both tenants and landlords, for many the economic disruption has still caused significant pain. Now, attention has fallen to what the government will do to support tenants, landlords and the economy as a whole, as we embark on the long road to recovery.

 

What has been done to support the Commercial Property market?

At the start of the pandemic, the government enforced a number of measures including the moratorium on forfeiture of commercial leases, the Corporate Insolvency and Governance Act, and a new Code of Practice for the commercial property sector.

While most measures enforced mandatory regulations, the Code (snappily entitled “Code of Practice for commercial property relationships during the COVID-19 pandemic”) emphasises the importance of landlords and tenants working together collaboratively to ameliorate the Pandemic’s impact.   This included how the Code should help landlord and tenant to come together to negotiate affordable rental agreements that are mutually beneficial to both parties. It was intended that the Code would sit alongside their other measures and provide tenants with some much-needed flexibility to work with their landlords.

Yet, while this new Code paved the way for tenants and landlords to collaborate and negotiate, it was by no means law.  And, it’s this distinction between law and guidance that has meant, for some tenants and landlords, the Code perhaps falling short on its intended purpose.

 

Has the Code of Practice provided enough support?

Since the start of the pandemic, many commercial business owners have witnessed their profits tumble, which has, in turn, meant many of them have been unable to afford the rent. Now, with the current restrictions on forfeiture and other measures still in place, some landlords have had to seek the aid of the courts in a bid to recover arrears from their tenants.

In the past couple of weeks alone, there have been two court cases concerning rent arrears, with both tenants mounting complex and detailed defences as to why their rent should not be paid.  The arguments raised were many, with some novel and clever points raised (and some less so).  The court took four months to give a judgement that ran to many pages and dealt with all the tenants’ arguments one by one; and dismissed all of them one by one.

For instance, the tenants stated that there had been a business interruption to the extent that they could not trade and relied on the standard commercial lease provision that enables a tenant to escape its rental obligations where the property has been destroyed by fire or flood etc.  “No” said the court.  The wording of the particular rent suspension clause was considered to apply to physical damage to the property only, not when closed due to legal requirements such as a government-ordered lockdown.

As to the Code, the tenants referred to their landlord’s conduct, arguing that they had failed to properly engage with the guidance provided by the government on negotiations.  As well as rejecting this as a matter of fact, as the landlords had in fact engaged proactively with the respective tenants, the judgment made clear that the Code is non-binding and does not alter legal relations between landlords and tenants.

In truth, it is difficult for the court to have arrived at a different decision given that is what the lease said and what the law said.  And impossible to see how the government could have brought in legislation that would impose on commercial landlords an obligation to renegotiate rent with tenants where the tenant asserts an inability to pay.  This would place on commercial landlords an onerous responsibility of having to forensically assess a tenant’s ability to pay.

Also, in one of the cases, the Judge iterated that the Code should not be viewed as a charter for tenants declining to pay rent. As made clear in the Code itself, tenants that are financially able to pay their rent should do so.

But, where does this leave the poor commercial tenant still struggling with the impact of the Pandemic and unable to reach an agreement with their landlord?  Here, there needs to be an injection of common sense, something the Code did seek to achieve.  After all, tenants who genuinely can’t pay will not be tenants for long.  Unless the landlord has a ready replacement, no tenant means no income and, as a result, the landlord having to personally bear the cost of insurance, rates, utilities and security.  Better a tenant on reduced terms than no tenant at all.  This can be achieved by a sensible fixed-term compromise agreed between the parties’ legal representatives and embodied in a well-drafted agreement whereby rent is reduced for a specified period and/or spread by monthly payments.  This would preserve the terms of the lease, while enabling the tenant to recover as the economy bounces back.

 

How Carbon Law Partners can provide you with the support you need

Whether you’re a tenant looking to renegotiate your commercial lease or a landlord in need of help covering the legality of eviction, Carbon Law Partners can help.

At Carbon Law Partners, we have a community of lawyers ready to help you solve your commercial property problems. As specialists in the commercial property sector, we cover everything including Commercial Agreements, Finance & Recovery and Property Disputes.  By adopting a pragmatic and constructive approach, we can help you resolve your commercial property matter and achieve the outcome you deserve.

To find out more about Carbon Law Partners and the services we have to offer, feel free to get in touch. Our lawyers will be more than happy to answer any queries you may have.

Author
Luke Weldon
Luke Weldon

Luke is a partner at Carbon Law Partners.  He specialises in real estate disputes.