Landlord & Tenant | Coronavirus: a life after...
What can tenants now do to protect themselves in the event that they are affected by a similar pandemic in the future and what changes might landlords…
It seems a little early to be considering these issues but in anticipation that one day the words “coronavirus” or “COVID-19” may be a distant memory how will this unprecedented period in the world’s history affect leases going forwards and the relationship between landlords and tenants?
After 9-11 we saw an increased awareness in leases of the need to include terrorism as an insured risk and the inclusion of uninsured risk provisions in the event that terrorism was no longer insurable.
What can tenants now do to protect themselves in the event that they are affected by a similar pandemic in the future and what changes might landlords require?
It is fairly common to see break clauses in longer leases, typically ten year leases with tenant break options after five years. Tenants may want to try to negotiate additional break options in their leases in the event that they are prevented from operating from the premises for a prolonged period. However, this is likely to be resisted by landlords. It also may not be necessary if tenants have the benefit of a rent suspension in similar circumstances.
Generally speaking, force majeure clauses aren’t common in lease documents and there are probably limited circumstances where they would actually be required. There are certain circumstances where they may be relevant however such as where the tenant has an obligation to keep open the premises (referred to below) or where the tenant has entered into a licence for works with a landlord where they have an obligation to carry out certain works within a particular timeframe.
However, as a belt and braces approach, it may be that we see more boiler plate force majeure clauses included by tenants in an attempt to avoid liability under the lease where they are unable to fulfil an obligation because of circumstances beyond their control.
Keep open provisions are generally reserved for retail leases, and are especially required by landlords where the yearly rent includes an element of turnover rent as landlords seek to maximise their rental income.
Whilst this should already have been commonplace in a well negotiated lease, tenants should ensure that they do not have an obligation to keep open the premises where they are prevented from doing so for a reason beyond their control. This may be by way of a specified exclusion or a general force majeure clause, as referred to above.
Turnover rents are used less nowadays as internet orders are becoming more commonplace and therefore turnover for a particular premises is difficult to determine. Where they are used it is possible that landlords may not agree to pure turnover leases. Where turnover rent is agreed it may be in addition to a basic rent payable by the tenant securing a bottom line rent for landlords.
Historically rent and service charge have been paid quarterly in advance. This can be a significant sum that a tenant has to find on each quarter day, which affects cashflow. Over the last few years more tenants, predominantly in the retail sector, have negotiated monthly rent payments either in the lease or documented in a side letter as a personal concession. It may be that in the future more tenants try to insist that rent and service charge will be paid on a monthly basis as opposed to quarterly. This could take some of the strain off tenants’ cashflow with smaller sums being paid up front each month.
It is commonplace for leases to contain an open market rent review every five years. The rent review can generally be initiated by either the landlord or the tenant with time not being of the essence i.e. if the rent review date has come and gone and no reviewed rent has been agreed or determined the review will not be lost.
Whilst this could be agreed between the parties, landlords may want the ability in the future to unilaterally delay rent review dates until such time as any pandemic or similar situation has ended to avoid any potential issues in the valuation of the open market rent.
Landlords may review their rent review clauses to include a disregard of any temporary negative effect on business caused by a pandemic. Tenants are likely, on the whole, to resist such a change. However, those tenants who may benefit from a pandemic, such as pharmacies or supermarkets, may accept such a disregard provided that it also applies to any positive effect on business caused by a pandemic.
Generally speaking, the open market rent review would be an upwards only review, meaning that at the rent review the reviewed rent would be determined as the higher of the passing rent and the market rent. Given the challenging situations a lot of retailers in particular are facing, which have only been exacerbated by the current pandemic, we may be moving towards a situation where upwards only rent reviews start to be opposed by tenants who just want rents reviewed to market value.
This is likely to be opposed by landlords however who wish to protect their rental income and may cause some issues in financing of property portfolios where the rental income could potentially reduce over time. The new RICS Code for leasing business premises interestingly makes reference to upwards only rent reviews but only comments that tenants should be made aware that with upwards only rent reviews their rents could end up being above market value in a falling market.
Insurance provisions in rack rent leases will generally require the landlord to insure the premises with an obligation on the tenant to pay insurance rent. The provisions should also include a rent suspension clause, so that in the event of damage or destruction which renders the premises unfit for occupation or use, or inaccessible, the tenant will benefit from a rent cessor for the period of time it takes to reinstate the premises or until the end of the period the landlord’s loss of rent insurance covers, usually three years, albeit it can be longer. At the end of the loss of rent period, if the premises haven’t been reinstated or made accessible, there will generally be an ability for the landlord or tenant to terminate the lease.
In the future tenants may try and seek a widening of the above provision so that the rent cessor will also apply to a situation where they are prevented from accessing or trading from the premises due to a pandemic. Whether landlords are willing to agree to this or not may depend on whether insurers are willing to insure against such a risk occurring again in the future. If they do so, tenants may be required to pay a higher insurance rent to cover this risk but would benefit from the added protection the insurance would give them.
The issue with such clauses is going to be how they are worded. Will the rent only be suspended if the tenant’s business is forced to be closed by law, or will the rent suspension also apply if softer measures are taken in response to a pandemic, such as a government recommendation to ‘work from home’ which results in a significant reduction in footfall/trade?
There are likely to be plenty of grey areas where it is unclear whether the rent cessor applies and if it does, then what proportion of the rent it applies to.
Landlords should ensure that where they have obligations to provide services under the lease this is caveated so that they are not required to provide certain services where they are prevented from doing so for reasons beyond their control.
1954 Act (except in Scotland)
Where the security of tenure provisions of the Landlord and Tenant Act 1954 have not been excluded, unless a landlord can establish one of the grounds for objecting to a new lease, a tenant has a right to a new lease on substantially the same terms as its existing lease, subject to reasonable modernisation.
There are likely to be disputes between landlords and tenants as to whether or not ‘pandemic’ amendments to the existing lease are ‘reasonable modernisation’.
This is likely to lead to disputes between landlords and tenants seeking to achieve the best possible position for their own purposes. What is or is not reasonable modernisation is likely to be influenced by whether any of the above lease amendments become market standard in the next few years.
If the content of this update raises any issues for you, or you would like to discuss, please liaise with:
DDI: 020 8036 6963
Mob: 07458 002 903
DDI: 020 8036 6963
Mob: 07458 002 903
DDI: 0161 214 0659
If you require expert guidance on any matters related to rental property, please contact our landlord and tenant solicitors.