During the COVID pandemic the government used a variety of statutory and non-statutory tools to try and deal with the crippling effect of the crisis exacerbated by their own often complex, lockdown rules which led to falling sales and premises closures. They actively encouraged co-operation between landlords and tenants by way of non-statutory guidance, whilst legislating to lean heavily on landlords who in their view were required to bear the brunt of the crisis by protecting defaulting tenants (both those who couldn’t pay and those who could but preferred to keep their money in the bank), and asking landlords and tenants not to go to court wherever possible, presumably to avoid adding to an already overwhelming court list. So where has this left landlord and tenant relations?
Some tenants did not engage with their landlord, and just locked the door and walked away without responding to correspondence. For many small business owners in particular it was difficult to face the enormity of the effects of the pandemic and to engage with creditors due to the stigma that exists around business failure. In that case landlords had to wait for restrictions on enforcement to end before taking appropriate action or proceedings and writing off arrears not covered by rent deposits where tenants became insolvent. In some cases Landlords resorted to forfeiture by peaceable re-entry. This in itself can cause issues when trying to re-let premises given that a tenant can (in theory) apply for relief up to six months following re-entry, albeit that the courts frown on delay these days (oh the irony).
Others continued to operate from premises and benefited from the inability of landlords to pursue the usual remedies as a result of the COVID legislation but without engaging with their landlord (whether or not it was morally right to do so). This left landlords frustrated and seeking to recover historic arrears [through an already pressed court system]. This approach may have left a bitter taste for landlords – despite limited mortgage holidays and CBILS loans being available, not all landlords were in a position to write off the arrears, and lenders were watching highly geared businesses closely. Although savings were available through the government backed furlough scheme, property investment businesses often do not employ many people because of the nature of the business and were unable to benefit from these savings.
For those tenants who followed the government recommendations and opened up a line of communication with their landlords, in many cases this led to fruitful discussions; there were rent suspensions, personal rent reductions or rent deferrals amongst many other bespoke arrangements. Some parties went further and re-geared their leases by varying them or surrendering their lease in exchange for a new lease, adding in tenant break clauses or rent reductions in exchange for a longer term for example. Some occupiers immediately sought surrenders or surrenders of part to prevent financial distress. By and large lenders were supportive, and wary of the impact of the alternative, at least in the short term.
A number of commentators expected COVID to have a lasting and material impact on lease structures, there was talk of upwards and downwards rent reviews, turnover rents, index linked rents, pandemic and force majeure clauses becoming the norm. Whilst most practitioners will have seen these now and again, and precedent clauses have been developed to cover off these provisions, it does not feel like these have become the norm, perhaps in denial that this could happen again. A Bill to prohibit the use of upwards-only rent reviews in commercial leases and seeking to nullify such clauses in existing leases sponsored by the Liberal Democrats failed to gain traction and even index linked rents which had gained some popularity became suddenly rather unpopular following the disastrous mini budget during the Truss administration, specifically where not coupled with a cap and collar.
For those able to swallow their pride and engage with their landlords, there is no doubt that this approach has had the most beneficial impact, in some cases leading to true collaboration to support both landlord and occupier businesses. In my view, it is always better to enter into a dialogue with your landlord as early as possible if you are having financial or other issues. This remained true prior to the pandemic - as outlined above was the best strategy to adopt in the pandemic - and continues to be a sensible tactic now.
Susanne Hinde is a Partner in our Commercial Property Team in Cambridge who specialises in advising Landlord & Tenants on their investment / occupation requirements. You can contact Susanne for advice [javascript protected email address] or on 01223 791026.
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