07 April 2020

Notwithstanding the national lockdown, the terms of a commercial lease already entered into remain binding on both parties. Landlords and tenants should take a moment to consider whether the clauses in that lease can be complied with, the steps that need to be taken and, if appropriate, come to an agreement on how to document any temporary variations.

The following key clauses should be considered:

Rent

It is critically important for both parties that what is agreed is properly documented given that commonly used terms such as rent reduction and rent suspension are open to interpretation. Does this mean that a certain amount of rent will not be payable for a period of time but will then become payable at a later date? Clear and concise drafting to capture what the parties have agreed is key. There is a high risk that a chain of email or other correspondence between parties may be misconstrued and result in a dispute at a later date.

For a simple variation in rent payment, the most appropriate way to document this would be by way of a back letter issued by the landlord to the tenant. The back letter is a personal arrangement between the landlord and the tenant binding both parties and it does not act as a formal variation to the lease.

Break Options

Tenants may wish to exercise break options amidst the current uncertainty. A tenant confident of trading beyond the lockdown may wish to leverage renouncing a break option in lieu of receiving more favourable commercial terms from a landlord moving forward. Anything agreed between the parties here should be properly documented by way of a variation to the lease or back letter, the particular circumstances will dictate the appropriate method.

Keep Open

Whilst some leases may contain keep open clauses obliging a tenant to trade from the premises, in the current climate, these are likely unenforceable given the government issued guidance that all non-essential businesses are to close temporarily. There likely isn’t any need to document this as a standalone exercise, however, if documenting a rent variation, then it makes sense to capture period of non-occupation at the same time.

Statutory Compliance

Tenants will still be obliged to comply with all government statutes and regulations, notwithstanding they may have vacated the premises. In relation to rates, if not already done so, tenants should look on the relevant local authority website for guidance on how to apply for rates relief.

Insurance

In most leases, the landlord will insure the property and the tenant reimburses the landlord for the premium paid. Given the current climate and that most tenants will have temporarily vacated their premises it is important for landlords to ensure that all requirements of any policy of insurance have been complied with by their tenants. Tenants will likely be responsible for any action of theirs that results in the policy being void, therefore of equal importance from a tenant perspective. Both parties should read the insurance policy carefully for any specific requirements. As a minimum, premises should be secured with alarms set and there will also likely be a requirement for the premises to be checked periodically.

Whilst it is possible that some business interruption policies may respond to the pandemic, the Association of British Insurers has already pointed out that it is unlikely that standard business interruption cover will respond: https://www.abi.org.uk/products-and-issues/topics-and-issues/coronavirus-hub/business-insurance/

Summary

In summary any short term arrangement between the parties which departs from the terms of the lease should be properly documented, even if both parties have already complied with that arrangement. This provides clarity in these uncertain times and removes the potential for any dispute at a later date.

Contact: Callum McInnes, Senior Solicitor T: 0141 221 8012 E: cfm@bto.co.uk

Also see: Commercial Property: Times not so tight...extra time for tenants