Our partners at Corcoran French have written this handy guide to help commercial landlords and tenants navigate the lockdown period.
What do I do about rent?
First, check your lease. Many modern leases (post-earthquake) contain provisions addressing what happens when the premises are undamaged but can’t be accessed. In the current ADLS lease, it’s clauses 27.5 and 27.6. Those clauses provide for two things:
First, the rent and outgoings should reduce by a fair proportion. There are no legal precedents as to what a “fair” proportion is, but consider things like whether the tenant continues to obtain some benefit from the premises. Does it contain a computer server room which is still in use allowing staff to work from home? Does the tenant have advertising on the premises which is of some benefit?
We have generally seen large (50% or more) reductions given, but it’s case by case. Often there will be non-legal considerations which are relevant and affect the percentage which is agreed. We discuss some of those below.
Secondly, the current ADLS lease provides for a “no access period”. Where the premises cannot be accessed for a certain period (normally 9 months), then either the tenant or landlord can give notice terminating the lease on 10 working days’ notice. Hopefully we do not end up in nine-months of lockdown, but keep this clause in mind and check that the period in your lease is in fact 9 months and not a shorter period.
Most landlords and tenants are agreeing what is happening to rent during this time. If agreement cannot be reached, the current ADLS lease provides for arbitration as the default dispute resolution mechanism. It may however be quicker and cheaper to use expert determination. This would require the tenant’s agreement, and there are some disadvantages to this process, so seek advice before proposing this.
What if there’s no such clause?
If there is no clause as noted above, then there is unlikely to be any legal requirement on you to reduce rent. You should however check your lease carefully to see whether there is a “force majeure / act of god” clause. There are normally tight timeframes with such clauses.
Putting aside legalities, there are often practical issues which might mean that you should consider a rent decrease. We advise taking a long term outlook on this. If the lease has some time to run, it may be beneficial to assist a good tenant to stay in business over this time. Once the lockdown is over, there may well be a lower demand for commercial premises – some experts are predicting a lengthy economic recession. Forcing a tenant to pay full rent now, with the effect they go out of business, may mean you’re left with vacant premises which are hard to re-let.
What about other issues and relief?
The current situation raises numerous issues for commercial landlords beyond simply rent abatement. By way of example, if your company is faced with reduced rental income, will it be able to meet its other commitments? Directors have duties under the Companies Act which need to be borne in mind, although it is proposed that some of these will be relaxed. It is intended that this will allow companies more leeway in attempting to trade through a financial crisis.
Trading banks have announced relief options such as interest only periods and mortgage holidays. Investigate these if necessary. Unfortunately the Government-backed loan scheme announced recently does not apply to property investment or development businesses, but such businesses remain eligible for other relief.
Likewise the Government has announced proposed law changes to allow debts to be “parked” with the agreement of creditors. You may wish to take advantage of this option, or alternatively you may be faced with a request from a tenant. The proposed regime would allow debts to be deferred for up to seven months. Fifty percent of creditors need to vote in favour of the proposal.
You should also check any other contracts that you have (such as cleaning, property management, etc) to see what options and obligations you have under those. Some contracts might be “frustrated” (impossible to perform) which ends both parties obligations. Some contracts will provide for what happens in these kinds of cases.
This situation is unprecedented and calls for all businesses to carefully analyse and plan their operations and finances over the coming months. A whole-of-enterprise approach is necessary given that many different aspects of a business overlap. We are happy to assist with any queries you may have.
The CPIA would like to congratulate Rowan Aspros on her elevation to partner. She makes sure our members are kept informed on legal issues relating to property investing, and brings a lot of expertise to her new role.
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