In Boris Johnson’s first daily coronavirus update yesterday, he urged the general public to stop “non-essential contact” and “all unnecessary travel“, and to avoid social venues including “pubs, clubs and theatres“.
Although supermarkets have been doing a roaring trade in pasta, hand sanitiser and loo roll in recent days, other retailers, restaurants and pubs have been conspicuously quiet. Therefore, with the March quarter day fast approaching it is unsurprising that a number of retailers and other operators have approached their landlords seeking various concessions including rent deferments/waivers and changes to opening hours.
Deferment or waiver of rent
Some landlords will be amenable to a tenant’s request for a deferment or waiver of rent in respect of the March quarter, given the unprecedented impact that the coronavirus has had, and will continue to have, on tenants. If landlords wish to grant concessions they should make sure that the concession is clearly documented. Both landlords and tenants need to be clear on:
- whether the concession is a waiver or a deferment; and
- if a deferment, how long the deferment is for.
Six months down the line when the coronavirus is (hopefully) just a bad memory, what landlords and tenants do not want to be doing is arguing over the scope of the concession.
If landlords do not want to agree a deferment or a waiver of rent, then they have a range of options open to them if a tenant fails to pay the March quarter’s rent:
- Forfeiture: The landlord will invariably have a right to forfeit for non-payment of rent. However, it is worth bearing in mind that if the tenant has only requested a relatively short deferment, then the tenant is likely to obtain relief from forfeiture on the basis that it will be able to remedy the breach (i.e. pay the rent) in the near future. As always the landlord will also need to weigh up the commercial risk and cost of having to re-let an empty property, as well as becoming embroiled in relief proceedings.
- The Commercial Rent Arrears Recovery regime: A landlord of commercial premises can recover rent arrears by taking control of a tenant’s goods at the leased premises. Importantly rent, for the purposes of CRAR, means principal rent only.
- Other options: If a tenant has provided a rent deposit, then the landlord should be able to draw down on the deposit in respect of any unpaid rent. Alternatively, if there is a guarantor on the hook, then a landlord may wish to pursue it for any unpaid rent. Landlords should also look at their Authorised Guarantee Agreements if the current tenant is not the original.
Closure/change to opening hours
If a lease does not contain a keep open covenant, then the landlord cannot prevent a tenant from shutting up shop or reducing its opening hours. If a lease does contain a keep open covenant but, nonetheless, the landlord is willing to agree to a change to trading hours or, even, a temporary closure, this should be clearly documented. Of crucial importance when documenting such a concession will be how/when the concession will end.
Even if a lease does contain a keep open covenant which the landlord wants to rely on, case law makes clear that a landlord cannot force a tenant to trade from its premises. If a landlord does not want to see its premises closed or the opening hours changed, then this leaves the landlord with the following options:
- Seek damages for breach: A landlord could issue proceedings against its tenant seeking damages for the tenant’s failure to comply with its keep open covenant; however, it will be very difficult for the landlord to show any measurable loss. Even if the landlord is entitled to a turnover rent, given the impact that the coronavirus is having a tenant may well be able to argue that, had it traded, it would not have met any given turnover threshold in the lease and, as a result, its landlord hasn’t suffered any loss. Turnover clauses are usually bespoke and the landlord should consider how long the turnover period is, whether rent is annualised, whether there is a carve out for periods where the property is closed without permission and whether there is a base rent or ratchet.
- Forfeiture: The landlord is likely to have a right to forfeit for breach of a keep open covenant. However, if a tenant were to apply for relief from forfeiture, then by the time the matter went to court the tenant would likely be in a position to resume trading (which would remedy the breach) entitling the tenant to relief from forfeiture. As above the landlord will need to consider the commercial risk and cost of re-letting empty premises and becoming embroiled in relief proceedings.
It is not clear what will happen over the coming weeks, nor what the eventual impact of the coronavirus will be; however, what is certain is that retailers, restaurants and other tenant operators will face unprecedented pressure. Therefore landlords need to expect more requests for concessions from tenants and will need to consider their options on a case-by-case basis.