GOOD SOCIETY – A lesson for Landlords and Tenants

Wednesday, April 15th, 2020

GOOD SOCIETY – A lesson for Landlords and Tenants

by Justin Pinches [email protected]

Carter Bells Solicitors

I do hope this note finds you all safe and well and you have managed to avoid this horrible bug. I call it that as I expect you all like me cannot escape the hundreds of e-mails on the “C19 word” so I will refrain from using it.

That said it is precisely these e-mails that will help us all recover much quicker. The beauty of communication is that it takes the fear out of something, or at the very least limits its effect. People have stopped panic buying on the whole and the vast majority have started (actually) thinking of others and how they could help those more affected than themselves. A truly amazing snapshot of how wonderful society can be when it pulls together can now be seen on a daily basis.

When Boris Johnson announced lockdown nearly 3 weeks ago, I was half expecting, like a lot of people, a complete shut down of the economy and life in general. Far from it. In the subsequent weeks I have received a number of calls and e-mails from Landlord and Tenant clients asking for my advice on the Government’s announcement that rental holidays would be introduced.

First things first, a lesson for tenants. A rental holiday does not mean you don’t have to pay! It merely defers your contractual obligations to pay rent. It further adds on top an interest charge that is likely to be anywhere between 2 and 5% above base rate; sometimes even more (please read your lease!). In addition to the payment of interest, leases are also likely to include provisions that allow the Landlord to forfeit the lease in the event of default in paying the rent when due. The rental holiday that the Government have introduced is therefore limited to preventing landlord’s from taking enforcement action for now, nothing more, with the current measures lasting 3 months.

Of course, I did not know the answer, no one did. There are no immediate solutions to the current issues. However, following the comments received from clients I had some thoughts on a way we could all work through this. Accordingly, I decided to share my views and engage by immediately sending e-mails to every commercial agent I have had dealings with in the past to get a feel of what they were experiencing and their approach. My sincere thanks to all for their input. I have pooled my findings here.

As I have said above I have received many enquiries from tenants making blanket requests for rental holidays (assuming wrongly in some cases this would relieve them forever of an obligation to pay), or from landlords asking what they can do about tenants refusing to pay their rent, in view of the financial problems this would create for them when VAT and mortgage payments become due. Indeed, Burger King, Rymans and other larger tenants seem to have led the charge with their recent unilateral announcements to Landlords unilaterally imposing holidays of up to 6 months. I find this approach combative and lacking in business acumen.

If this approach continues, I foresee a very large problem down the line and it seems prudent for everyone to plan now rather than then when it is too late.

The devil is more often than not in the detail. One can’t for example compare Burger King, with a sole trader and therefore working out what is “fair” to both the Landlord and Tenant is going to take a considerable amount of analysis in some cases. Some of the information required is not yet to hand as we have at present no idea of how long the current climate will last and what further assistance, if any, the Government may provide further down the line.

As a result of the “rental holiday” Landlords have no ability to enforce until the Government releases these restrictions. Why tenants are therefore writing to Landlords demanding a rental holiday they are already entitled to is a mystery. However, given this, what is looming on the horizon is either a wave of claims for cash payments, or forfeiture (similar to the scenes of panic buying we have all already witnessed). This could potentially necessitate further government intervention to prevent or at the very least soften its effect and I believe this could well be a key element as to whether the country falls into a severe recession or even a depression when the dust finally settles. Taking positive action now means Landlords and Tenants can of course negotiate and control their own fate rather than leaving this to Government whose approach is one size fits all, which will actually suit all, may come too late for some, or even not materialise at all.

Parties who can therefore agree amicable settlements that fairly apportion the respective burdens will be ahead of the curve and better able to bounce back as they will be able to concentrate on getting their businesses back on a sound financial footing rather than defending court actions. This is why I find decisions by the likes of Burger King and Ryman short sighted as by adopting their approach they are seemingly inviting hundreds of court actions against at a time when they will need these resources to rebuild their businesses.

At present, many commercial tenants have been allowed concessions on business rates, a rental holiday, an ability to furlough employees, suspension of Tax payments and promises of interest free loans, with the possibility of further assistance not being ruled out. To date I do not believe that any of the current emergency measure address the position of Landlords.

I have therefore been recommending to clients, landlord and tenant alike that rather than a blanket request for rental holidays from landlords that the parties support concessions where these are required (with the emphasis here being that the tenant pays what they can) to agree to the suspension of rental payments or reduced rents for the current quarter, but with the landlord reserving the right to recover these in full. At the same time the Landlord must ensure that this approach does not materially undermine the landlord’s ability to comply with their own obligations under the lease. This will avoid a situation whereby a tenant refuses to pay rent, but then still expects a landlord to provide all usual services and amenities.

I recommend this for the following very good reasons:

1. Why ask for 3, 4, 5 or even 6 months of rental concessions which seems to be the approach of larger tenants, when we do not know how long the current crisis will last?

2. We do not know what the true extent of the allowances, benefits and concessions that may ultimately be put on the table, the method of applying for them or the final criteria for qualification. If, for example relief, was granted in respect of outstanding rent, the Landlord might be precluded from recovering it, if the rent had already been waived.

3. If the amount of assistance means that a claim for a large part of the rental that would have been due is available to the tenant, why should the Tenant have the sole benefit of this.

4. By adopting a conciliatory approach, lengthy and costly litigation is avoided.

5. The Tenant paying what they can and securing suitable rental concessions and payment schedules is more likely to avoid the additional burden of interest payments through amicable negotiations. Where tenants “pay what they can” this will leave the tenant with less of a financial burden long term, placing them in a beneficial position to take full advantage of the economic “bounce” when restrictions are eased.

6. It helps share the burden of losses that will inevitably affect all in appropriate and proportionate amounts, thus assisting in the recovery of the economy as a whole and further aid the speed of that recovery.

I truly believe given the alternative which is likely to result from this unprecedented event that this is likely the only viable solution that allows the parties even a fighting chance of both entities being in a position to continue in business in the long term.

I started this note by mentioning society’s initial response to the virus, panic buying and generally a complete misunderstanding about the importance of isolation and social distancing. Learning from these lessons it seems businesses have I believe to answer one question. When the dust settles do, they still want to enjoy a mutually beneficial landlord and tenant relationship and be in business in the long term or not.

Justin is a Partner at Carter Bells Solicitors. He specialises in all aspects of commercial property, acting for Landlord and Tenant in the grant of leases and buyers and sellers in the acquisition of freehold interests for a broad range of uses such as offices, restaurants, retails shops, hotels and development land. He also assists clients in the acquisition and disposal of businesses and companies through share sales.

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