TENANTS, COMMERCIAL LEASES IN SCOTLAND & CORONAVIRUS
23rd March 2020
Answers to Tenants’ Questions on the Impact of COVID19
In this note we offer general advice on the most common issues tenants face in coping with the unprecedented effects of the coronavirus outbreak. We aim to update this guidance note periodically as the situation develops. This note assumes that a tenant’s commercial lease follows a standard form incorporating widely used clauses. It does not constitute legal advice. For specific advice, you should consult a solicitor on the terms of the actual lease.
Perhaps the most pressing of difficulties facing tenants right now is cash flow. Many tenants will have paid their last quarter’s rent in advance either on 28 February, 1 March or 15 March. As such, the next stress dates are likely to be late May or June.
Most leases will not allow a tenant to suspend payments of rent as a result of the coronavirus outbreak. They will only allow for rent suspension where premises are damaged or destroyed as a consequence of specified insured risks. Tenants will need to approach landlords to seek a restriction of rent.
What options are available to tenants to reduce rent?
• Refuse or delay to pay rent to the landlord - whilst the simplest course of action, there are better options and ones worth taking whilst the landlords may be sympathetic to tenants’ plight. Non-payment of rent may also disqualify a business from obtaining an emergency loan from the Coronavirus Business Interruption Loan Scheme (see below). If a tenant has secured a concession from the landlord document in a back letter or side agreement to the lease (e.g. a cap on a service charge or restriction of repair liabilities), non-payment of rent may invalidate this concession.
• Switch to monthly rather than quarterly rent payments - some landlords actively prefer tenants to pay rent monthly, as it gives them a sooner indication of problem payers. It may assist a tenant’s cash flow to pay in smaller monthly amounts.
• Seek a temporary ‘rent holiday’ – a tenant could ask for a temporary rent free period or deferment of rent until the worst period of the coronavirus outbreak is over. A tenant would be best advised to put a clear proposal to a landlord by providing, for example, a draft agreement with a clearly defined period as to the length of time a ‘rent holiday’ should apply
• Negotiate a reduced rent – some tenants may want to take the opportunity to secure 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.
• Tenants in retail or leisure units could offer to switch rent 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.
• Ask the landlord to apply any rent deposit towards the next rent payment
Rates relief and government grants
In Scotland a package of measures mirroring similar measures in England have been announced (https://www.gov.scot/news/gbp-2-2-billion-for-business/). This includes a 100% non-domestic rates relief for retail, hospitality and tourism for the coming year and grants for small businesses that pay little or no business rates. The Economy Secretary has also announced an effective freeze on next year’s rates increase.
Coronavirus Business Interruption Loan Scheme
The UK government has announced a Business Interruption Loan Scheme. The loans will be available from the British Business Bank from Monday 23 March. The loans will be interest free and government backed. Recipients must have a turnover of no more than £41 million per annum and must operate within a qualifying sector. Further terms of the loans are set to be announced in the next few days.
Tenants’ business interruption insurance provides cover for damage to premises following events such as fire and flood which prevent businesses trading. This isn’t a policy that is commonly considered necessary, particularly by small to medium sized businesses. In any event, the Association of British Insurers has noted that standard business interruption insurance policies do not typically include forced closure by the authorities. As a result, even if the government does decree that all businesses are to close, relatively few policyholders would have this cover.
If tenants’ business interruption insurance does not apply, it is worth tenants asking to see their landlords’ insurance policy and schedule. It is just possible that the landlords’ insurance policy may give the landlords the ability to claim for loss of rent or business interruption (e.g. relating to health and safety regulations) and allow the landlords to suspend payment of rent.
Can a tenant close the premises?
This is of particular concern to tenants of retail and leisure units, given the decline in footfall pressuring them to shut stores or restrict opening hours. A number of retail clients have also cited staff shortages as a reason for being unable to keep units open.
First, as a general principle, all tenants, whether retail, office, industrial or leisure, must occupy the premises. In most cases, a landlord cannot rely on this general obligation to force a tenant to trade from the premises. Instead, the tenant must maintain at least a minimum level of occupation. This is likely to include at least one staff member being present on the premises during normal business hours.
Leases of retail and leisure premises, however, often include a specific clause requiring tenants to keep open the premises during certain days and times. A ‘keep open’ clause is designed to prevent tenants from shutting up shop. They are most often seen in leases of multi-occupancy sites, such as shopping or leisure centres, where the closure of a unit would have a negative effect on the businesses around it, and the general prosperity and desirability of the centre.
In the current circumstances, it is likely to be harder for a landlord to succeed in enforcing such a clause. A tenant could rely on other clauses in the lease as justification for temporary closing of a retail or leisure unit. Most commercial leases include obligations to comply with health and safety regulations and guidance for employees and visitors. A tenant may be able to argue that temporary closure is the only safe way to implement the recent government guidance on COVID19.
It is harder to know a tenant’s legal position if government guidance changes. Does a tenant have a legal obligation repeatedly to open and close a shop, each time that government guidance is relaxed and then tightened? Is the tenant in breach where it has had to let staff go following one period of closure of the premises and is unwilling to recruit new staff to be able to re-open? For these reasons it would be best for tenants to write to their landlords to give reasons as to why they intend to close their retail or leisure units and the circumstances in which they will re-open. They should invite the landlords to agree to the tenants’ proposals.
There are situations where tenants should take particular care and again seek the landlords’ agreement to a closure. Leases containing turnover rent often contain penalties of an increase in base rent from a premises closure or assume a daily turnover amount where premises are closed. Where a tenant has sub-let the unit, or part of the unit, a tenant may be in breach to their landlord of a ‘keep open’ clause as a result of the sub-tenants’ actions, not their own.
Tenants may want to argue that the coronavirus outbreak is an event outside the control of the parties to the lease and, hence, entitles the tenant to end the lease early. Whilst this is unlikely in many leases to justify early termination of a lease, the precise terms of the lease and the type of premises matter. Where, for example, a lease of a pub requires the tenant to keep the premises open, there is at least an argument that the combination of the public house licence and government guidance to close may frustrate the lease. Tenants should take legal advice on this point.
A tenant will have the legal right to end the lease early if the lease includes a tenant break option. It would be worthwhile checking the lease terms for the exact dates and to know the period of advance notice required.
The coronavirus is likely to remain a problem for 18 months - though, we all hope, a diminishing one. Tenants of new leases would be wise to include ‘force majeure’ clauses to allow them to get out of leases where they are prevented from trading because of a repeat of the coronavirus outbreak forced shutdown of business.
For tenants wishing to explore any of these ideas further, please contact your usual contact at WJM or, alternatively:
Glasgow office: Colin Brass (firstname.lastname@example.org)
Edinburgh and Dunfermline offices: Michael Dewar (email@example.com)
Inverness office: John Smart (firstname.lastname@example.org)
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at March 2020. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.