As we see restrictions starting to relax amidst the Coronavirus pandemic, it is important to remember that we are far from returning to normality. The impact of the virus has been significant for businesses across the UK, but charities find themselves in a unique position as society leans heavily on their services for support.
Whilst being busier than ever, many charities have significant overheads, such as commercial tenancies and staffing costs but have had their income stream reduced by the Coronavirus crisis, seeing fundraising events cancelled and charity shops closed.
This article offers guidance to charities in respect fulfilment of their obligations under commercial tenancies during these unprecedented times.
Where a tenant is unable to pay their rent due the current situation, the Coronavirus Act 2020 offers some protection from eviction. Under this legislation, landlords cannot forfeit commercial leases on the basis of rent not being paid until the end of June with the Government holding the power to extend this. However, tenants are not exempt from paying their full rent nor are they entitled to a rent reduction unless provided for in the lease.
In addition, there is the proposed Corporate Insolvency and Governance Bill which significantly limits the action a landlord may take if a tenant is in arrears due to Coronavirus. The Chancellor has also provided business rates relief for those in retail, hospitality and leisure sectors allowing some charity tenants to be able to benefit from a business rate holiday for the tax year 2020/2021. These changes act to relieve some of the pressures on tenants during this unstable period.
The Cabinet released guidance on the 7 May 2020 covering responsible contractual behaviour in performance and enforcement throughout the Covid-19 emergency. This states that parties should act responsibly and fairly in a way that supports the response to Coronavirus and seeks to protect jobs and the economy. This will again offer relief to charity tenants that the law is weighted on their side during this difficult time.
Check your Lease
If you are a charity tenant under a commercial lease and are concerned you will not be able to pay your rent or service charge when they become due, you will need to review the terms of the lease for the property.
Typically, a commercial lease may offer that rent is suspended if the property is no longer fit for occupation, such as in the event of a fire or flood, which would not capture this scenario. However, there may be provisions for a reduction in rent or service charge if access is unavailable, which could offer some support in requesting a rent concession if for example, the lease is of a charity shop which is not allowed to open under the Government’s guidelines. Provisions in the lease are unlikely to expressly provide for situations like these given such times are unprecedented, but if you think certain prescriptions within the lease could be helpful, we would be happy to review these for you.
Check your Insurance Policy
Commercial tenants should hold insurance to cover the property, which may contain cover for business interruption. If tenants are struggling to cover the rent under the lease, they should review their policy to see if any support is provided under their insurance.
In addition, premises are to be left unoccupied for some time under the lockdown restrictions, tenants should identify whether they are obliged to notify their insurers under their policy of the closure of the premises or the tenant’s absence from them.
Ask the Landlord for a Rent Concession
Given the instability of the current situation, landlords would generally prefer a tenanted unit to a vacant one and if the prescribed use of the property is still prohibited under the staged release from lockdown, it may be difficult to find new tenants. Therefore, they may be open to agreeing a rent concession until you are able to return to trading as normal and it is important to start an open-conversation with them regarding this as soon as possible before the rent falls due. This could be in the form of a reduction of the rent, a suspension of payments or a payment plan for recovering the outstanding funds.
When negotiating a rent concession, we would recommend you agree the duration of the concession period and whether the landlord will have the power to demand the full balance at a future date or if any payments will be written off. If you are able to agree a rent concession, we would recommend it is in writing to avoid any issues in the future.
Ending your Tenancy
If you are unable to negotiate a rent concession or you wish to end the tenancy as soon as possible for whatever reason, you may have the following options available to you:
Serving Notice on Expiration of the Lease
If the term of the lease is due to expire, you can vacate the property and hand it back to the landlord, subject to any conflicting provisions within the lease. If the term of the lease has expired and are still in occupation on a rolling tenancy, you can serve an s27 Notice on the landlord, or the notice as specified in the lease, to bring your tenancy to an end. The notice period will depend on the terms of the lease or any statutory timescales associated with the specific notice.
If serving notice on your tenancy, it is important to check the process thoroughly to ensure it is valid whilst considering potential issues in compliance, such as delays to the postal service, difficulties in returning the property to the landlord with vacant possession etc.
Frustrating your agreement
The doctrine of frustration allows a contract to be discharged when an unforeseen event occurs which renders the performance of the contract impossible. In many cases, it is likely the outbreak of Coronavirus has made performance of obligations more difficult, time-consuming or costly, but not impossible to perform which will not allow for discharge of the contract.
It is also important if seeking to claim frustration that the situation is not already accounted for within the agreement. For example, the courts held in Canary Wharf (BP4) T1 Limited & Others v European Medicines Agency  that Brexit did not frustrate a lease as there were alienation provisions within the lease and there was nothing legally preventing either party from complying with their obligations under the lease. Given most leases contain alienation provisions, it is difficult to see how a different decision could be reached by the courts in respect of Coronavirus and with many struggling financially, it is difficult to see a case coming to court to confirm anything different.
Exercising a Force Majeure Clause
A force majeure clause alters parties’ obligations and liabilities under a contract when an extraordinary event or circumstance beyond their control prevents fulfilment of the obligations. Dependant on the drafting of the specific clause, there are a variety of consequences of such provisions, including excusing the affected party from performing the contract, excusing a delay in performance, entitling a party to suspend or claim an extension of time for performance or giving a party the right to terminate.
Given the unprecedented circumstances that we currently face, it is likely the courts will be generous in their interpretation of force majeure clauses, even where pandemics are not expressly included, to assist parties that have encountered a genuine difficulty in performing their obligations. However, given the variation amongst such provisions, it is important to obtain legal advice before seeking to rely on a force majeure clause. To be able to rely on force majeure, there must be a force majeure clause in the lease and such clauses are rarely included in the vast majority of leases.
In any event, any action undertaken falls under the guidance from the Government to act responsibly in a way that protects jobs and the economy.
Exercising a Break Clause
The lease may contain a break clause to allow the landlord, the tenant or both to terminate the lease early if the process as specified by the lease is followed.
These provisions vary significantly from lease to lease. For example, some leases will require notice to be served prior to a specific date whereas others contain a rolling break allowing the landlord or tenant to end the lease at any time provided a specific period of notice is given. However, as long as any conditions specified in the lease are satisfied, the lease can be ended prior to the end of the term.
Given the current situation, landlords will be reluctant to lose tenants and may scrutinise the conditions of the break clause to ensure compliance. With the varying nature of these provisions and the pressure of the current climate, we would recommend you take legal advice to ensure compliance with the conditions and successful break of the lease.
Negotiating a Surrender
If the lease does not contain provisions for ending the tenancy early, your landlord may be willing to agree to the surrender of the lease. This means both parties agree to bring the lease to an end on a given date. As mentioned above, landlords may be reluctant to lose tenants as it may be difficult to re-let the property, so may not agree to surrendering the agreement but it will depend on their current situation and their intentions for the property.
If the landlord does agree to the surrender, the property will need to be handed back with vacant possession so you would also need to consider how to empty the premises and return the keys under the restrictions in place. However, given the recent changes to allow house moves to take place, this is less likely to be problematic than if we are returned to the initial lockdown measures.
If you are a charity tenant who would like advice on any of the points in this article, please do not hesitate to get in touch.