Lease Q and A: landlords and tenants

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The implications of COVID-19 on commercial property continue to evolve. We answer some common lease questions still faced by both landlords and tenants.

Can the terms of a lease be varied to assist either party through difficult times?

It can be in all parties’ interests to discuss any hardships being experienced and to work together to find a solution. However, there is no legal obligation to agree proposed variations and acceptance will generally depend on commercial viability.

As the workforce returns, will leases allow tenants to adapt workplaces to meet COVID safety requirements?
Occupiers will need to consider social distancing, space between workstations and possible extra facilities such as cycle storage to facilitate safer commutes. To protect the value of a landlord’s reversionary interest, leases usually limit alterations. Commonly, external and structural alterations are prohibited but internal non-structural alterations are permitted with the landlord’s consent. In multi-occupied buildings, alterations to common areas are likely to be carried out by the landlord but with the costs potentially recovered through a service charge, although landlords should carefully consider the provisions of each lease to check whether they can actually recover such costs.

What is a covid clause and should a lease contain one?

Covid clauses are still evolving. There is no market standard yet and the extent to which landlords will agree them is unknown. If, agreed, they apply if the Government imposes measures that restrict or prohibit the tenants’ use of the property to prevent the spread of COVID-19 and range from a rent suspension to a tenant’s right to terminate the lease.

Can a landlord terminate for non-payment for rent yet?

Commercial landlords are barred from forfeiting commercial leases and evicting tenants for non-payment of rent until 25 March 2022. The Government has also announced that it will bring in new legislation requiring landlords to reach agreement with their tenants over rent arrears that have accrued due to COVID and if they cannot agree they will be required to settle by entering into a “binding arbitration”. “Covid arrears” will be those arising from the March 2020 quarter to the June 2021 quarter.

Can a tenant terminate the lease or withhold payment of rent?

Leases normally require rent to be paid on specified dates without deduction or set-off, meaning it is unlikely a tenant can withhold payment without the landlord’s agreement. Break clauses, rent suspension and force majeure clauses should be reviewed. If the lease cannot be terminated, tenants may be able to agree a surrender or assign or sublet with the landlord’s consent. Landlords will review the financial standing of the incoming tenant and additional security might be needed. A lease can also be frustrated (which means it comes to an end immediately) if it is impossible or unlawful to use the property at all, and not just for a specific business purpose. The Courts have set a very high bar for successful claims and we are not aware of a successful claim for COVID reasons.

Here to Help

If you would like advice on any commercial property issue, please get in touch with our Commercial Property Team.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.