Whilst the government's new advice doesn't give much certainty regarding next steps, it does set out a minimum timeline which many operators, particularly in the leisure sector, will not find attractive. However, despite the conditional nature of the plan, there is still a small glimmer of light at the end of the tunnel for operators.
So, what can operators do to help their positions during the route back to a normal (or new normal) economy and in the future? We have summarised below some of the suggestions being made by our operator clients.
Agreements for lease
1. Flexible access dates – given the uncertainty as to when restrictions are going to be lifted, we are seeing control for access dates being transferred to the hands of the tenant rather than the landlord. This means that tenants cannot be forced to take access and start the rent clock ticking until they are ready.
2. Flexible Rent Commencement Dates – Rent Commencement Dates usually reflect the rent free period and are a fixed period after the Access Date. However, with the risk of a second peak and future delays, tenants will be more comfortable if rent does not become payable until they have opened to trade (allowing for fit out taking longer than the estimated rent free).
3. Conditional completion dates – where tenants are able to commence operations only after the lifting of the Covid-19 restrictions, fixed completion dates could be linked to the restrictions being lifted.
4. Additional rent free – some tenants are agreeing to shoulder some of the risk as to when the restrictions will be lifted, but in return for an extra rent free period. So, where a previous 6 months has been agreed, tenants are agreeing not to include any of the above protections, but are receiving a 12 month rent free period in return.
5. Additional long stop dates – we are seeing Covid-19 related long stop dates allowing the tenant (or either party) to terminate if the restrictions have not been lifted by a fixed date (which is generally sooner than other conditions in the agreement), so that all parties are better able to forecast with a maximum wait period.
6. Flexible opening dates – landlords generally require the tenant to open by a specific date, to ensure that works are carried out promptly. However, given the risk of delays, any required opening dates should be flexible so that the tenant is not penalised for either due to delays in fit out or due to restrictions still being in place.
1. Rent suspension – we have been asked by a number of clients to insert clauses which suspend the rent should similar 'lock downs' be imposed in the future. A clause such as this would be along the following lines:
(a) In the event that the tenant is prevented from trading from the Property due to restrictions imposed by the government or other regulatory body (either linked to epidemic or pandemic or more generic to cover future situations), payment of all rents, service charges and other sums shall be suspended until such restrictions are lifted.
(b) Any rent paid by the tenant in advance which relates to the period during which the restrictions are in place shall be refunded to the tenant.
(c) Any rent free period being enjoyed by the tenant at the point of imposition of such restrictions will be extended by one day for every day on which the tenant is unable to trade due to such restrictions. This would cover the same situation as mentioned above.
Health warning: agreeing a clause like this does remove the tenant's ability to negotiate if such situations arise down the line. Therefore, if landlords will not agree a full rent suspension, tenants should consider whether it is better to leave the discussion for when the situation arises.
2. Break clauses – it is well discussed that break clauses should not have conditions that require vacant possession. This is particularly important now, as tenants will not be able to access the properties to remove and reinstate as usual. Therefore, this is another reason to hold firm on the requirement for the break clause only to be conditional on (i) payment of the annual rent and (ii) the property being free from rights of occupation.
3. Keep open clauses – there is again a standard and well discussed qualification to keep open clauses which prevents a tenant from being liable for closures outside their reasonable control. Whilst previous examples have included terrorist activity or a neighbouring burst pipe, pandemic will surely fall into this category so is another basis on which to hold firm on this clause.
4. Turnover rent – whilst this clause is very dependent on the specific business, careful consideration needs to be given to splitting out turnover treatment of deliveries and on site sales, to avoid 'delivery only' periods artificially effecting the lease long rental liability.
The above is just a selection of some of the solutions we have seen raised so far, but the bottom line is that this is a landlord and tenant relationship negotiation so the possible ways of alleviating the future risks imposed by Covid-19 are wide ranging; the more imaginative the better!