Will Covid change the future of office rentals?

posted by Tristan Wark
16 November 2020

With England in the midst of a second nationwide lockdown, it’s not just those in the retail and hospitality industries who will struggle.

Back in March when England’s first lockdown commenced, property lawyers were inundated with questions relating to temporary lease concessions. Tenants wanted to know if they were legally obliged to pay rent for premises they couldn’t use due to government guidelines, while landlords sought to take action against tenants who withheld rent, or asked for agreed concessions to be formally documented.

What is the forfeiture moratorium? 

While a second lockdown is far from ideal, the position is more settled this time – the ‘forfeiture moratorium’ is in place until the end of the year. The forfeiture moratorium stops a landlord from terminating a lease due to non-payment of rent or commencing Commercial Rent Arrears Recovery (CRAR); however, it doesn’t mean tenants can get away with not paying rent. Landlords can still issue court proceedings against tenants for non-payment of rent, if they are unable or unwilling to defer payments until next year, and charge interest on late payment in accordance with the terms of the lease. 

Code of Practice for commercial properties 

The government has also now published its Code of Practice for commercial property relationships during the Covid-19 pandemic. A key tenet of the code is that if a tenant can pay then it should pay. If it can’t pay in full (or at all), it should pay what it can when it can. However, the code is voluntary and non-legally binding, and for the most part landlords and tenants were already having the discussions suggested by the code well before it was published.

The more settled national position does not mean there are no issues. Struggles of the hospitality and retail sectors have received much attention, but a number of occupiers of industrial spaces are similarly suffering – businesses that supply restaurants, hotels, bars or the travel industry have seen their work dry up just as much as their customers. 

Although such businesses can make the case for a rent concession, the problem is that landlord responses are varied and rent concessions are a bit of a lottery – I have seen a number of landlords being quite generous to their tenants (instances of landlords waiving six months’ of rent) while others who have refused to waive any rent. Even if a landlord cannot offer a full rent waiver, they still may be able to assist their tenant, perhaps by moving from quarterly to monthly rent payments to assist with cashflow, or agreeing a rent deferment payment plan to enable a tenant to settle rent arrears over a longer period.

Protect your leases post-Covid 

In light of the impact of Covid-19 and the mass restructuring of working life, what changes should occupiers be seeking to their future leases? The obvious one is to include a rent suspension provision in the event the tenant is prohibited by statute from using their premises. Landlords won’t like this and will fear it will make their lease unacceptable to institutional investors who may purchase their freehold interest in the future. 

They may ask that tenants trust them to do the right thing in the circumstances regarding future rent concessions, but bear in mind a landlord can sell their interest, so the party whom you negotiated a rent concession last time around may not be the party who you need to agree a rent concession with next time. 

There is also benefit to having an agreed position from commencement of the lease, rather than having to negotiate and document a rent concession on each lockdown.

Occupiers should think very carefully about this when they enter future leases – consider how much better off some businesses would be if they didn’t have to incur rent costs during the lockdown. It could literally mean the difference between solvency or insolvency. 

☛  Tristan Wark is a senior associate in the commercial real estate team at London law firm Goodman Derrick LLP.

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