Uncha"real"ted Territory
As the world as we know it moves into unknown territory we provide some practical guidance for tenants to mitigate the adverse impact of the pandemic on their businesses and manage cash flow as we fast approach the March quarter date.
Short-term/immediate considerations
Rent concessions/deferrals
Many tenants will be looking to defer rent payments or agree a period of rent free. There is of course the option of simply withholding payment of rent. However, this is not without risk and it exposes tenants to forfeiture, the prospect of winding up the company following service of a statutory demand and the risk of bailiffs attending the premises to remove goods to the value of the arrears. The latter has a wider implication for business disruption and reputational damage.
Some tenants may take the approach of staging or deferring payments on a monthly basis, although this does not prevent the landlord from taking any of the steps above.
We would advise that you discuss deferrals with your landlord and engage with them now before the rent falls due. In desperate times it is likely that your landlord will also be able to do a deal with you and we can assist with the documenting of any such agreement.
Business interruption policies
Tenants must check their business interruption policies in details and check the terms of the same.
Medium term and long-term considerations
Exiting/Terminating Lease
The starting point is to check the lease to see if there are any relevant provisions to assist:
- Break clauses: a tenant break clause giving the tenant the option of bringing the lease to an early end. The tenant must check whether this is conditional on anything such as payment of rent up to the break date;
- Force majeure: a force majeure clause but this is rare in leases;
- Frustration: as above, it is difficult to argue frustration in leases;
- Assignment/sub-letting: it may be possible to assign or sub-let the leases but that is often with landlord's consent and the landlord will require and be entitled to require certain security from the tenant such as an authorised guarantee agreement (which it may not be in a position to or be willing to provide).
Future documents
Tenants should consider including force majeure wording in leases and ensuring they are widened to cover pandemics.
Conclusion
The key is to fully understand your legal rights and obligations to determine whether or not you will be fully exonerated from your liabilities given the crisis and if not, how you can mitigate the ramifications by coming to a commercial arrangement with the other parties to the agreements.
At Howard Kennedy we are able to assist you in all Real Estate matters. We are more than willing to discuss your options with you to enable you to protect your business needs in these testing and uncertain times. Please contact Bhavini Patel (Bhavini.patel@howardkennedy.com)
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