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Advice on the legal issues faced by commercial tenants during the pandemic

Posted by Alexandra Ketchley on 2nd June 2020

Government policy to manage the COVID- 19 crisis and a desire for businesses to trade responsibly by protecting their employees and customers has affected virtually all businesses operating from commercial property in the past few months.

Commercial property tenants are likely to be experiencing a short-term change in the way their businesses operate from the properties they occupy and many will have made, or will be considering, some of the following changes to the way they currently operate:

  • Making a temporary change to what they use the property for;
  • Carrying out internal or external alterations to their property to enable them to trade in accordance with government guidance and protect staff and customers;
  • Seeking additional outdoor space;
  • Attempting to negotiate rent concessions.

As we acclimatise to new ways of operating, some businesses may find it necessary or even desirable for them to continue some of the operational changes they have implemented as a result of the COVID-19 crisis on a more permanent basis.  Over the coming months we expect many businesses to find themselves in a position where they are considering:

  • Whether to make permanent changes to the type or nature of their business are desirable in response to a changing market;
  • Whether they need permanent alterations to their property to future proof against further waves of COVID-19 or future pandemics; and
  • A complete re-evaluation of the commercial property needs of the business going forward.

As a result of the unprecedented effects of the pandemic, we are finding that landlords have generally been supportive to their tenants in allowing temporary concessions in relation to commercial leases. In some circumstances, such concessions have allowed tenants to temporarily operate in breach of their lease obligations.

However, a tenant should be cautious in assuming that because its landlord has offered a temporary concession, it will be willing to agree to this on a permanent basis.

The emergency legislation the government recently introduced in the Coronavirus Act 2020 protects tenants by preventing landlords from forfeiting a lease for rent arrears, presently until 30 June 2020 (although this may be subject to further extension). It should be noted, however, that this legislation does not provide any protection to tenants whose lease allows a landlord to forfeit it for other breaches of the terms of the lease. As a result, tenants need to be mindful of legal issues which may need to be properly navigated in relation to any current or proposed changes to the way they operate from their property to ensure they remain compliant with the terms of their lease.

Ensuring compliance with the terms of commercial leases

Tenants should be considering the following actions they are taking, or intend to take, which could cause it to breach a term of its lease.

Carrying out alterations to a property 

Tenants may consider making alterations to the property in order to comply with government guidance, protect staff and customers and operate safely from their properties. Often in commercial leases, the costs of complying with government regulations in relation to the property are the responsibility of the tenant, and in many cases, there is an obligation on tenants to comply.

If a tenant has made or is proposing to make, alterations to its property to enable it to trade legally and safely, it is important to check the lease terms to determine whether:

  • the consent of the landlord is required; and
  • whether the tenant is required to reinstate any alterations at the end of the terms.

To some extent, this will depend on the nature of the proposed alterations. Some commercial leases offer tenants the flexibility to carry out internal alterations to its property, but many require the consent of the landlord to any alterations carried out. The majority also require tenants to reinstate all alterations made to the property at the end of the lease.

Any unauthorised alterations would constitute a breach of the terms of the lease. It is possible that the lease may contain a limited exception which excludes the requirement to obtain the consent of the landlord where a tenant is under an obligation to comply with all legal requirements in relation to the property, but this exception would likely extend only to carrying out the minimum level of alterations required to ensure compliance.

It is important that a tenant checks its lease prior to carrying out any proposed alterations so it is aware of the consents required.

Seeking use of outdoor space

It appears that restrictions may be relaxed earlier for properties with outdoor space available. Tenants may seek to make use of outdoor areas adjacent to or adjoining their properties.  If a tenant identifies any such space, it will need to check the terms of its lease carefully to ensure either space forms part of its lease (and if so, whether it is permitted to use it for the intended purpose) or it has been granted rights to use the space by the landlord in its lease, which is suitable for the tenant’s proposed use (for example, are the rights granted on an exclusive basis).

If a tenant does not benefit from suitable rights to use the outdoor space for its intended use, it may be possible to reach an agreement with its landlord for it to grant a new lease or licence of the outdoor space. Landlords may be willing to accommodate such requests, particularly in circumstances where it enables a tenant to operate from a property more effectively or sooner than it would otherwise. A landlord is, however, likely to require this to be formally documented and require a tenant to obtain any planning consent required for the use.

We would advise a tenant to seek legal advice in relation to any new lease or licence it proposes to enter into to ensure that the terms are suitable for the intended occupation and it does not give rise to any unintended consequences, such as a surrender of its original lease and/or additional tax liability.

Changes to how a property is used presently and/or in the future

If a tenant has temporarily changed its use of the property and intends to continue with the change for a longer period or on a permanent basis, it should check the terms of its lease carefully. Most commercial leases will require the tenant to obtain planning permission (if required) and the consent of the landlord for any change of use.

Whilst tenants are currently able to benefit from a temporary extension of permitted development rights under planning legislation (which, for example, presently allows all pubs and restaurants to operate as hot food takeaways), this is unlikely to be a permanent concession.

Separate to the requirement for planning consent, the landlord’s consent is likely to be required. In circumstances where landlords have recently agreed to a temporary change of use of the property (possibly in breach of the terms of the lease), a tenant should not assume that the landlord will be willing or able to agree to the use continuing on a longer-term or permanent basis.

There are a number of factors which may prevent a landlord from being able to agree to what may seem a minor change of use. For example, the landlord may be subject to its own planning conditions in relation to letting the property or may have agreed on a restrictive covenant with a third party preventing it from unilaterally agreeing to a change of use becoming permanent. It is important that any permanent change of use is agreed and documented properly between the landlord and tenant to avoid the use breaching the terms of the tenant’s lease and potentially giving the landlord a right to forfeit.

Temporary or longer-term re-evaluation of commercial property needs

The pandemic has forced many businesses to develop new ways of working. As a result, commercial tenants may discover that their commercial property needs have changed, whether on a temporary or permanent basis.

In the short term, tenants may seek additional space to enable them to comply with current social distancing regulations, and enable the safe return of employees as quickly as possible. Businesses may consider whether additional space is needed as part of a longer-term strategy to enable employees to operate on-site with social distancing, thereby minimising business interruption arising from any further waves of COVID-19 or a future pandemic affecting the UK.

Conversely, businesses may find that the new ways of working which they have developed during the pandemic make it viable to consider a permanent reduction in their current commercial property holdings. Tenants may seek full or partial termination of leasehold assets by exercising break clauses, negotiating with their landlords for a partial surrender or sub-letting existing space no longer required to other occupiers. In all circumstances, it is imperative that legal advice is taken to ensure that any agreed course of action is lawful and properly implemented.

Our commercial property team can assist businesses with all commercial property needs whether arising from COVID-19 or otherwise. Please contact Alexandra Ketchley or any another member of the Commercial Property team.

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