As the UK leave the second National Lockdown many businesses once again have been forced to close or to curtail severely how they operate, it is time for businesses to look ahead and consider if they can future proof their contractual relations, and in particular their business leases.
In June 2020 just before the first Lockdown came to an end the Government published its Code of Practice for Commercial Property Relationships during the Covid-19 pandemic. This can be found on the Gov.uk website.
The code was designed to set out best practice to ensure the viability of businesses but compliance with it is voluntary and it, therefore, does not provide any certainty for businesses. The code dealt with such things as negotiating rent suspensions or rent concessions and whether the costs for extra cleaning measures and health and safety compliance could be passed on to tenants.
Long term it is advisable to incorporate comprehensive pandemic clauses into future business leases such clauses can deal with such matters as:
- Rent suspension or rent concessions
Most leases do include rent suspension clauses which apply when a business is prevented from operating due to an insured risk but this is unlikely to operate in pandemic situation where most buildings insurance policy will not afford cover. Moreover, such cover is unlikely to be available or to be offered at a very high premium whilst there is an ongoing pandemic. Specific clauses need to be incorporated. Also, consider rent concessions such as turnover rents being reduced (as opposed to suspended) to reflect the loss of trade.
- More frequent rental payments
Traditionally rents in the commercial property market are payable quarterly but in such trading conditions when “cash is king” consider more frequent rent payments.
- Break clauses
Always advisable but now frequent break clauses which can be exercised by the tenant at regular intervals throughout the lease are now essential. But watch out for conditions being attached which you are not able to comply with such as vacant possession and compliance with repair and decorating obligations at times when you are not able to access the premises and even if you have access the contractors who can carry out any required work are not available.
- Tenant’s covenants
In a pandemic situation where your ability to trade is restricted or prevented beware of “Keep Open” clauses which take no account of inability to trade during government imposed partial or full lockdowns.
- Rent reviews
Traditionally rent reviews have always been upwards only and landlords have had flexibility to implement these at a later date when market conditions are more favorable. Perhaps this unprecedented situation will impact on how and when rent reviews are implemented.
Wimbledon hit the news as being the only sporting event which had the foresight to put in place pandemic insurance which meant a huge payout when the event was cancelled this summer. However, despite this most businesses have not had such foresight.
The usual position on most business leases is that the landlord insures the building and the tenant picks up the cost of this insurance. Most leases will provide a comprehensive list of insured risks but these do not usually include pandemic, epidemic or other similar risks. As discussed this links to when rent payments may suspend. Pandemic insurance is likely to be an issue going forward and you can expect insurance premiums to increase.
- Quiet Enjoyment
This is the covenant given in most leases by landlords. Clearly in a pandemic situation when many landlords have been forced to close their buildings due to compliance with Government imposed restrictions there is an argument that landlords may be in breach of their covenant for quiet enjoyment.
- Force majeure provisions
These clauses are rarely included in commercial leases but they are often included in commercial contracts. The aim of these clauses is to afford protection from liability for non-performance of contractual obligations due to unforeseen events and may be coupled with a right to terminate the contract. It might be that we will see more of these types of clauses being included in commercial arrangements including leases with a pandemic, epidemic and other crisis situations being included on the list of force majeure events.
Although it is impossible to provide for every eventuality in these uncertain times many tenants will be best advised to negotiate clauses in their leases which make them more flexible and “Covid-19 proof” and many landlords may be more willing to agree to such clauses to ensure their premises are let out. Moving forward I would expect more flexibility and co-operation in the lease market which is to be welcomed.
For more information regarding your commercial property, please contact:
Alison Turner – Head of Commercials Property | 01302 965 251 | firstname.lastname@example.org
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