Covid-19 and Commercial Leases: What Landlords and Tenants Need To Know

Almost a year on and the UK is continuing to deal with the knock-on effects of the Covid-19 pandemic. What was seen as a short term solution to the outbreak has continued for 12 months now, with many businesses struggling to justify keeping their doors open. Commercial landlords and tenants are growing increasingly more concerned about their current property arrangements and financial obligations, at a time where most businesses have been closed or reduced for months on end.

With a number of restrictions placed on commercial premises and businesses, there have been many implications for both landlords and tenants, so what are the key concerns and what do commercial landlords and tenants need to know moving forward?

Can Tenants Withhold Rent or End Their Lease Early?

Given the financial impact that Covid-19 is having on commercial tenants, a question that is frequently asked is whether tenants can refuse to pay their rent or look at ending their lease early. The starting point here would be to review the terms of the lease in place at the moment and consider whether:

  • There is a break clause that enables the tenant to end their lease early
  • Are any turnover rent provisions which are solely dependent on the income generated by the commercial premises

A lot of modern leases tend to provide rent to be payable without any dedication and in these circumstances, a tenant is unlikely to be able to withhold payments for reasons relating to the pandemic, unless there is a provision within the lease that allows them to do so. Typically, rent suspension or reductions only apply where the premises has been destroyed or damaged, so tenants may struggle to argue for a rent reduction.

What About The Coronavirus Act 2020?

In March 2020, the government passed the Coronavirus Act 2020, which currently prevents forfeiture of property between 26 March 2020 and 31 March 2021, for the majority of commercial leases for non-payment of “any sum” which is due as part of the lease. If either a tenant or landlord is having issues with rent or their lease, then it is advised that they seek legal advice as soon as possible.

Can Landlords Agree to a Reduced Rent Payment?

If you are a landlord and your commercial tenants have asked for a reduced rent payment, then you can agree to this. The advantage of this would mean that you still have some rent coming through at a time where commercial property is being hit hard, but it is important to record any agreement to a reduction in rent in writing with your tenant in order to avoid it being used at a later date, for example, to argue a rent deduction for the remainder of the term.

Are Lease Reviews Still Going Ahead?

Commercial rent and lease reviews tend to go through a rent review every five years and can be initiated by either the landlord or tenant. Given the huge impact that Covid-19 has had on the economy, a lot of properties will likely now let for much less than they would have in 2019/2020.

Because of this, it is likely that any rent reviews due during the current period will determine the rent of the property for the next 5 years, so this isn’t good news for landlords. As there are very few properties that are benefiting from the pandemic, many landlords are choosing to defer a rent review until certainty has returned to the property market and they can make their money back on their properties. When it comes to commercial lease renewals, it is important that for both the landlord and tenants benefit, that the lease terms are agreed on from both sides, so deferring a lease review, for the time being, is probably best.