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How to mitigate potential issues when returning to work in let commercial properties

News / 21-08-2020 / London

There are several potential issues facing occupiers proposing to return to work in let commercial premises:

  • Shops may not be able to accommodate the government’s guidance on working safely during the pandemic in practical terms.
  • Restaurants may not be able to operate profitably with the required distancing between diners.
  • Offices may not be able to allow the expected footfall during peak times.

Therefore, we recommend the following courses of action that each of the above sectors may want to consider:

1. Engage with your landlord

Keep your landlord advised of your planned return to work and any problems you anticipate with the ability of premises to comply with government guidelines and safe practice including any impact that may have on turnover and profitability.

If you operate a shop premise, let your landlord know of any practical issues, such as limited customer access at the same time;

If you operate a restaurant, a reduction in seating may not only cause a profitability issue but potentially breach a covenant in your lease;

If you operate from an office on an upper floor, you will need to know how your landlord intends to apply those guidelines to common parts, such as lifts, where density of footfall will be severely constrained.

Your landlord has an interest in your business surviving the pandemic. Negotiate any rent or other concessions that you need to keep your business going as soon as possible. Most landlords are open to negotiating significant concessions at this time. On 19 June 2020, the government introduced a code of practice to assist discussions between landlords and tenants on rent and service charge concessions (which came into force 24 June 2020).

Whilst the code is voluntary, it encourages both parties to enter into discussions in good faith and with flexibility. It suggests possible arrangements for new rental payments and recommends that if a landlord is aware that services will be curtailed during the pandemic, that any service charge reduction is quickly assessed and passed on to the tenant without delay.

 

2. Consider any looming tenant break clause

Break clauses are often negotiated to accommodate a tenant’s possible future need for alternative premises. In practice, they often coincide with the dates of rent review, preventing otherwise upward only rent review clauses from being implemented by allowing tenants to negotiate terms dependent not on the provisions of their leases, but on market forces instead.  

Check your lease for any break clauses, particularly if you are aware your lease contains a rent review date in the near future. A landlord is more likely to consider rent concessions where the landlord is at risk of imminently losing a tenant as they will be left with being responsible for rates if the premises become vacant.

 

3. Force majeure 

The usual provisions in commercial leases that provide for rent or service charge abatement only apply when the premises have been physically damaged or destroyed or access is physically prevented. Unless the lease contains a force majeure provision the lease will continue through the pandemic.

Force majeure provisions, whilst common in other forms of commercial agreement, have not been prevalent in commercial leases, particularly leases negotiated in institutional or standard terms.

However, in light of the current pandemic, new leases are likely to include Covid-19 pandemic provisions, which transfer the burden of rental loss during a pandemic currently experienced by tenants onto landlords. Any such provisions are likely to affect a landlord’s yield on property and consequentially their ability to raise finance on investments - particularly as the prospect of future pandemics can no longer be considered remote.

Landlords are expected to seek to avoid, or at least severely curtail such provisions, except in circumstances where the relevant provisions provide for rent suspension during a pandemic and the landlords building insurance covers pandemics as an event of loss particularly as the premium for that insurance is usually paid by the tenant.  

 

4. Review and take advice on any business interruption policy held

Many insurers are currently denying that loss interruption caused by the pandemic is an insured event under business interruption cover. As a result, in May 2020 the Financial Conduct Authority (FCA) announced its intention to bring a test case to establish the liability of insurers on business interruption insurance cover during the pandemic. The FCA has also issued good practice guidance to insurers on all business interruption claims they receive. This requires insurers to notify claimants of the FCA test case - and to advise all business interruption claimants of the outcome.

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Commercial contracts