Commercial Property: Landlords and Tenants Playing Poker

Most commercial Tenants, including many High Street chains, are now asking their Landlords for some sort of rent concession over the next three months or so. In the retail sector this was taking place before the current situation as many shops on the High Street have been under pressure for some years. From our experience at Elliott Matthew, some of the bigger landlords are starting to give concessions, a significant number of Landlords are willing to delay payment of the March quarter, and some have agreed to forego the March quarter. Some will accept a reduced rent. However, the majority of Landlords are holding firm and demanding full payment of rent on time. Some very aggressively.

As evidence of concessions by other Landlords comes to light, we believe that Landlords may start being more flexible. When the commercial realities of the situation become clear, the initial firm position of some Landlords may soften as they realise that they may have to be more flexible or face losing a meaningful proportion of their Tenants.

We expect that overly aggressive Landlords may drive some Tenants out of business. Also, if Tenants find their Landlords are acting unreasonably, they will be less likely to renew the lease when the current term comes to an end or they may operate break provisions etc. Small Tenants with Limited companies that are effectively worth nothing may find it cost effective to liquidate the current company and start a new trading entity. Larger companies may seek to reorganise their group structure to defeat claims by Landlords.

Some Landlords may take the view that if a Tenant is likely to fold that it would be better for action to be taken now rather than later and take back control of the building. At the same time, Landlords will be wary of losing too many Tenants as after 6 months they will have to pay business rates for the empty properties.

The new normal

Many businesses were running on tight margins before Covid-19. There is no escaping the fact that business will go bust and there will be widescale repossessions of properties. The press suggests there could be a million business failures, which we believe will change the letting landscape. Furthermore, Tenants may now adapt to more remote working which will reduce the need for office space, and increased familiarity with online shopping could hasten the reduction in required retail space. Some enterprises such as supermarkets will be unaffected, but it is clear that the demand for shops, offices, and warehouses will be reduced in the medium term. The consequence, we believe is that market rents will fall.

When Landlords in the coming months and years find themselves with empty premises, tenants are likely to be able to be selective when it comes to which premises they rent. Landlords with bad reputations will be avoided. The new world of social media means that Landlords seen as taking a harsh line may face reputational damage that could harm future trading. Unless Landlords own prime premises that will find Tenants in any market, landlords are going to have to assess whether it makes good business sense to ignore the commercial realities that Tenants are facing.

The options in negotiation

Landlords and Tenants are facing a novel situation and are being creative in their approach to the situation. Some options include:

• Cancelling a quarter or a month’s rent or reducing rent to a sustainable level. Some tenants whose doors are shut have demanded this. A few landlords have taken the long view and agreed to this. Most have not.
  

• Delaying payment of rent. This provides short term relief but is only a long-term solution if the Tenant’s business can cover the rent later on. Defraying the rent over the remaining period of the lease or over the next 2 or 3 years may work well for both parties.

• The Tenant borrows to pay the rent. Many Landlords say that as there are government supported schemes to take out loans that this is how the rent should be paid. This puts the burden on the Tenant alone and could lead to business failure down the line.

• The rent is varied to reflect the turnover or profit a business receives. This shares the burden between Landlord and Tenant but is not likely to be well received by the Landlord unless there is potential for a significant upside in the future or the Landlord does not see a better option.

• If there is a rent deposit some Tenants are proposing that is used to cover the rent. Rent deposit deeds usually contain a provision under which the Tenant can be pursued to top up (replenish) the deposit, so using the deposit may only delay legal action. A Tenant in difficulties may try to negotiate that there is no need to top up the deposit.

• Some Landlords are agreeing to reduce rent payments in return for renegotiating other provisions such as personal guarantees.

Landlords and Tenants should take care when using the words “rent holiday.” Some people think this means no rent is payable at all for the instalment or until further notice, whereas some people think it simply means a delay in paying rent. Any agreement that changes obligations in a lease should be properly recorded to ensure clarity.

Emergency legislation forces negotiation

The Coronavirus Act 2020 has recently introduced a number of protections for Tenants which we will detail in a following article.

The main change is a three-month moratorium on the issuing of new possession proceedings but there have also been other changes such as winding up petitions being postponed for three months. These have a number of implications for Landlords.

If a Tenant does not pay rent, a Landlord can make threats and write letters. Court proceedings for a money claim (CJJ) can still be commenced but will take time to issue. If a defence is filed it will take months to bring the case to trial. Even if a CCJ is obtained in 1-2 months’ time, enforcement action options will be limited and are unlikely to be fruitful for some time.

Terminating a lease gave the Landlord an immediate remedy or threat to make. The Landlord may still have options such as claims against a rent deposit or Guarantor, serving rent diversion notices if there is a subtenant and Commercial Rent Arrears Recovery (seizing assets of the tenant after 7 days’ notice expires) remain live.

However, if those measures are not available, the Landlord’s hands are largely tied in the short term. Tenants should however see this as nothing more than breathing space to come to a longer-term agreement with the Landlord. Aggressive Landlords could run up substantial claims for costs and interest that could substantially worsen the position.

All of which suggests that negotiating with the Tenant is a prudent course of action. Which is of course the government’s intention.

It is likely that insolvency action will be delayed by legislation shortly and we will cover the changes to insolvency law in a further article.

While the issue of a debt claim and service of a statutory demand are still options, most Courts are operating at reduced capacity and it may take time to bring a case to Trial. If a case does come before a Court, a Judge is likely to be as sympathetic as they can to a Tenant suffering as a result of the coronavirus. The Companies Court has, from 23rd March 2020, adjourned all winding-up petitions for a minimum of three months.

Ultimately, despite the legislation, any concessions will depend on the negotiation between the Tenant and Landlord. The Landlord’s position is likely to be affected by its view on the likelihood of re-letting the property. If a property is desirable and the landlord can easily re-let then it may be willing to release a tenant or be willing to push harder with the existing tenant, knowing that its risk is low if the Tenant leaves or its business fails. If the property is not considered desirable, then the Landlord is in a weaker position and the Tenant in a stronger position in the negotiation.

If Tenants or Landlords are facing insolvency, they should take advice at an early stage to establish whether there is a solution or action should be taken to minimise the damage, impact upon employees or investors and the personal liability of directors. We are here to help and guide you, should you need assistance.

Please contact Edward Jones at Elliott Matthew Ltd on 07876 255398, edward@eml.legal if you require advice on the above issues or any real estate, insolvency or disputed debt matters.

This note was written on 3rd April 2020. This content is provided free of charge for information purposes only. Events are moving fast, and the law and its interpretation are changing rapidly. This note does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the author or Elliott Matthew Ltd.