As businesses up and down the country nervously consider their cash-flow situation given the sudden escalation of the Covid-19 crisis and dire uncertainty regarding how long it will continue, a key item of consideration will be the issue of rent payments- a not insignificant overhead.
In this situation, there are several options, which in turn depend upon your short or long-term aim.
You may be in a situation where your business has been struggling for a while and Covid-19 is the final straw- the game is up- you want to get out of your lease. You may, on the other hand, be looking for some financial relief, but are keen not to lose your premises as that would involve even more disruption. So, here are some possibilities that tenants might want to consider.
Options if you want out……….breaking up…..it’s not you, it’s me……..
The “break” option.
If your lease term is approaching the expiry date, you simply vacate by that date. Easy.
If your lease still has a while to run, check to see if you have a break option which is exercisable: you may have a rolling break that you can exercise at any point or you may have a fixed break date coming up and still have time to serve notice to exercise it.
If your lease has expired, but you are still in occupation, then depending upon what type of tenancy you have, you will be able to serve notice to quit. Often, tenants “hold over” after expiry of their protected business tenancies pending a new lease being put in place and if this is the situation you are in, then three calendar months’ notice needs to be served. For other tenancies, it depends upon the facts of the ongoing occupation as to what length of notice is required.
Be careful though, break notices can be tricky things to validly exercise, so it is best to take legal advice on this.
The “pass the buck” option.
If you have a reasonable term left on your lease (with no break rights) and if your lease so permits, you may be able to assign or sublet (re the latter- either the whole or part), but of course this depends on finding an assignee or a subtenant, which in turn then requires landlord’s consent. In the current climate, either of these may be difficult to pull off and are not usually quick fixes. Further, you will still retain residual liability to the landlord either because on assignment you were asked to give a guarantee (which is common) or because you remain the intermediate landlord, so if the undertenant defaults you remain liable.
The “surrender” option.
You could ask the landlord to consider a surrender deal, although in the current climate landlords will not be wanting to lose their rental income unless they have been wanting the property back to occupy themselves or redevelop. Also, landlords sometimes request a reverse premium and/or payment for dilapidations as part of a surrender.
The “hoping for a nice legal technicality” option
Now that all but essential key businesses have been asked to shut down and if your business is not the type that lends itself to remote working, your business premises may now feel redundant, so can you get out of your lease another way?
Unlike general commercial agreements, it is unlikely that your lease contains a “force majeure” clause (i.e. a clause allowing you to terminate following the occurrence of a specific event, e.g. catastrophe or Act of God outside of either party’s control) but do check. Similarly, it is currently considered unlikely that you would be able to argue that your lease has been “frustrated” (i.e. the contract is impossible to perform because you can’t use your premises) and so should terminate, however, do watch this space on this latter point as some legal practitioners think this area of law may evolve if business disruption goes on too long.
Options if you don’t want out….let’s work this out……
The “cheeky” option.
You could decide to simply pay your rent later than the due date but do be aware that most leases have interest on late payment provisions. In some leases, interest is payable immediately after the due date, in others it starts to accumulate after 7 or 14 days, but rarely longer. Note also that rental default is one of the most common grounds used by landlords to forfeit a lease either through court proceedings or “peaceable re-entry” (i.e. changing the locks), although it is unlikely a landlord would take this action in the current climate and emergency legislation is currently going through Parliament protecting commercial tenants from forfeiture/peaceable re-entry for non-payment of rent up until 30 June 2020, with powers to extend this period if need be.
Alternatively, you might negotiate a rent payment holiday with the landlord, although you may be lucky to get this, but it’s worth a try and whatever you agree should be documented in writing and signed by both parties.
The “compromise” option
If you pay your rent quarterly in advance, the landlord might be agreeable to you switching to paying monthly in advance instead, or even in arrears although this is unlikely. If the landlord does agree to this, they usually want this concession to be personal to the current tenant and the agreement is documented by way of a side letter that both parties sign. In the 2008 recession, many high street retailers switched to monthly rent payments, some permanently, so a suggestion of this type to a landlord would not come as a surprise and a sensible landlord will be keen to keep its tenant rather that lose them due to cashflow problems.
The “opportunistic” option…..fortune favours the brave…..
Even if the current crisis does not have an immediate and significant impact on commercial freehold values, you never know, your landlord might itself be cash strapped and might be willing to accept a (reduced) cash offer to purchase the freehold. You could switch from being a tenant occupier, to an owner occupier now holding a long term investment asset, although if the building has multiple tenants this might be a risky option and then of course there is the issue of having to manage those tenants.
The “business interruption insurance” option.
Do doublecheck your business insurance given Covid 19 is now a notifiable disease, however, your policy may exclude losses due to “communicable disease or fear thereof” and some policies cover damage to property only.
All is not doom and gloom. You do have options. Explore them. A culture of businesses helping businesses is fast emerging which is very heartening.