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Coronavirus and commercial leases

With cashflow front of mind for the vast majority of commercial tenants, the Coronavirus (Scotland) Act 2020 offers welcome relief for businesses.

The act has extended the time between the landlord giving notice for non-payment of rent to being able to proceed to lease termination from 14 days to 14 weeks.

Now the tenant will have 14 weeks, after the notice is issued, to pay the sums due together with interest.

The new period applies regardless of whether a notice has already been served (provided the 14-day period has not already expired) and irrespective of whether the circumstance which would entitle the landlord to terminate the lease already exists.

Importantly though, this doesn’t release tenants from the debt altogether. It simply defers the payment, kicking the can down the road. If the tenant still hasn’t paid by the 14-week deadline, the landlord is immediately entitled to proceed to terminate the lease.

Other remedies of enforcement would be open to the landlord in respect of the non payment of rent, albeit subject to operations of the courts and sheriff officers.

Lines of communication

What happens if the impact on a tenant’s business is so severe they seek to end the lease early?

A tenant can only do this if they have a break option entitling them to terminate the lease.

The advice here is to check the lease terms for relevant dates, what advance notice is needed as well as anything else that needs to be satisfied for termination.

Unfortunately, if there’s no break option, unless the landlord is in material breach of contract which would be unlikely, chances are a tenant wouldn’t be able to terminate the lease.

So what next?

If businesses will still struggle to pay there are options that warrant timely discussion with the landlord such as temporary rent holidays, or reduced rent.

Let’s look at the option of suspension.

Most leases will not allow a tenant to suspend payments of rent as a result of the coronavirus outbreak. They’ll likely provide for a rent suspension, but it’ll be limited to physical insured damage, as my colleague Victoria Leslie explained recently.

In reality, most leases are unlikely to contain specific rent reduction provisions in the event of a global pandemic. From a landlord's perspective, agreeing to a rent reduction or holiday will often depend on whether they see the tenant needs that cash saving in order to continue trading, and as such, whether they decide supporting the proposal is sensible in terms of longer-term rental prospects. Plus, the landlord may also be keen to avoid costs such as rates or the process of having to re-let the premises.

Fundamentally it seems co-operation between landlords and tenants would make the most commercial sense as the pandemic rages on. Regardless, and before taking any action, it would be wise for a tenant to seek legal advice to make an informed choice on the way forward.

John Mitchell

John is a partner in the firm’s commercial property department and has more than 15 years’ experience advising clients in the public and private sector. He has acted for international energy companies, healthcare services, police forces and property developers on a range of matters, including purchases, sales, construction agreements and acquisitions of development sites.

Posted, 14 April 2020 by John Mitchell
Categories: Commercial property | Coronavirus | Coronavirus and commercial property | Insights