Rent reliefs, break options and force majeure clauses – how commercial tenants can navigate COVID-19
The government is updating us daily with its response to concerns across the board regarding COVID-19 and the effect on businesses.
So to help, if you're a business premises tenant, here's some food for thought on negotiating with your landlord on your current lease, bringing your lease to an end as well as protective measures for new leases.
With the recent government lockdown on mostly essential businesses remaining open for at least the next three weeks, many tenants will now find themselves in a position where their premises are empty due to government guidance.
This could be, for example, because employees are working from home or, in the case of retail units, trading has temporarily ceased.
As the situation develops, many businesses are now realistically expecting to encounter cashflow issues and that means tenant worries about future rent payments.
If you pay rent on a quarterly basis, it so happens that the usual quarterly rent payment dates landed before 15 March, so many tenants may have already paid their rent for the next quarter.
Nobody saw the COVID-19 outbreak coming and so most leases will not be covered under Tenant’s Business Interruption Insurance — take a look at my colleague Victoria Leslie’s post on this topic and it’s worth looking out any insurance documents you may have, or asking the landlord to give you a copy.
Where then does that leave you if you have upcoming rent payments and limited or no cash available to meet your obligations?
The short answer here is for tenants to open up dialogue with their landlord and seek a rent relief. Some examples include —
- Negotiating a reduced rent — in shopping or retail centres tenants may find it useful to approach the landlord as part of a group of tenants, all wanting the same reduction in rent
- Suggesting monthly rather than quarterly rent payments — this may go some way in assisting cashflow as there will be smaller monthly amounts
- Offering to switch from market rent to turnover rent for the duration of the coronavirus outbreak — instead of paying full rent, tenants would instead pay a percentage of turnover to their landlords. This applies to retail or leisure units
- Asking if your landlord would apply any rent deposit towards the next rent payment
- Proposing a temporary ‘rent holiday’ — this would allow tenants either a deferment of rent or a temporary rent-free period until the initial uncertainty surrounding COVID-19 is over
It comes as no surprise many tenants may want to end their lease early.
In the first instance, you should speak to legal advisors about any legal right you may have to use any break option in your lease as well as any terms regarding notice periods.
Tenants may argue the COVID-19 outbreak is outwith their control and justifies early termination of a lease. In most cases this argument won’t fly, but it largely depends on the type of premises and the lease terms.
You might have heard the term ‘force majeure’ being spoken about a lot lately, and for more information on this, have a look at Jody Mitchell’s post.
If you’re thinking about leasing new premises, it’s worthwhile speaking to legal experts (our team can help of course) who can advise you on including a force majeure clause in your lease.
A force majeure clause would provide a way to end a lease where tenants are prevented from trading because a repeat of the coronavirus outbreak forced business shutdown.
And finally, it’s not all bad news — rates relief and government grants
The Scottish Government announced welcome measures for rates reliefs amidst the current uncertainty.
This includes grants for small businesses who pay minimal or no business rates as well as a 100% non-domestic rates relief for retail, hospitality and tourism for the coming year and a ‘freeze’ on next year’s rates increase.
With such a fast-moving situation though, there's understandably a lot for tenants to consider in a short period of time. So if you have any questions, please just let our commercial property team know, and we’ll keep you posted on any developments and updated guidance.