Collaboration is key – lease forfeiture advice for South Wales landlords and tenants

Matt Phillips, head of property consultancy Knight Frank in Cardiff, offers advice to both commercial landlords and tenants in South Wales in these testing Covid-19 times

These are challenging, unprecedented times. Covid-19 is causing significant uncertainty for UK organisations of every shape and size. One of the most pressing, and most complex, problems is the relationship between commercial landlords and their tenants. Both are under severe pressure right now and are desperately searching for solutions.

I believe the key theme in this current crisis is collaboration. Stand-offs, threats and a refusal to compromise will only end up damaging both parties.

So here goes. This is what we know so far. The Government has instructed all non-essential businesses to close for at least three weeks and, in an attempt to mitigate some of these negative effects, a range of measures have been announced to assist businesses – including a 12-month business rates holiday (for qualifying retail, hospitality and leisure businesses) and a job retention scheme.

One of the most recent measures announced by the Government, as part of the Coronavirus Act, is a temporary suspension of the ability to forfeit commercial leases. So what is forfeiture? Most commercial leases include a clause which allows a landlord to re-enter premises and bring a lease to an end where the tenant has been in arrears with rent for a certain period (often 21 days), where the tenant has committed other breaches of tenant covenants, or where the tenant has entered into an insolvency process.

Forfeiture can be carried out either by peaceable re-entry, which means that the landlord can simply enter the premises and change the locks (provided that no one is at the premises who objects to this) or by making an application to Court. Where the basis of forfeiture is rent arrears, the most common practice is to re-enter the premises rather than issuing Court proceedings.

The Act prohibits any act of forfeiture by landlords for non-payment of rent until the end of the relevant period which is currently 30 June 2020, and therefore catches the next rent quarter date of 24 June. This date can be extended by the Government.

What does this mean for landlords?  Landlords that otherwise would have been able to exercise their right to forfeit a commercial lease due to non-payment of rent are now prevented from doing so until at least 30 June 2020. Whilst no one knows how long the current situation will continue we cannot rule out an extension to the relevant period.

Commercial tenants, therefore, have a period of breathing space although it must be remembered that the rent remains due, and the Act introduces only a suspension on the ability to forfeit and does not affect the obligation to pay rent. Tenants should also keep in mind that their leases may be brought to an end by forfeiture for breach of other tenant covenants, which is not prevented by the Act.

The measures will undoubtedly be welcomed by commercial tenants and it has already been reported in the press that a number of household names, including Primark and Burger King, have already confirmed that they do not intend to make the quarterly rent payment which was due on 25 March.

However, enforcement action can still be taken by landlords for existing rent arrears, so an early, collaborative approach between landlords and tenants is highly recommended. Although the measures introduced and the current crisis generally is likely to have a negative effect on landlords’ short-term cash flow and the value of many landlord’s property portfolios, it appears that landlords may be more willing to  engage with their tenants, collaborating to find a solution which helps both parties to reach an agreement. One size does not fit all and we are currently spending a good deal of our time creating solutions to a quick-moving business environment.

We are likely to see many tenants withholding rent, requesting rent holidays, rent-free periods or a re-structure of how rent is paid. In practice, landlords are likely to be willing to work with their tenants to ensure that the effects of the current economic situation can be minimised and preserve their portfolios for the future, with tailored solutions appropriate for each situation.

More specifically, we are seeing a significant increase in the number of lease re-gear negotiations, which include:

  • Deletion of break clauses in exchange for rent-free periods.
  • Reversionary leases (to compensate the landlord for a short-term rent holiday).
  • Rent reviews – settlement of rent review in exchange for a rent free period or reduced / stepped rent period.

Prior to progressing any lease re-gear discussion, marriage value calculations need to be undertaken to ensure both landlord and tenant share the correct uplift in capital value.  These options should be considered and we recommend a detailed review of the lease prior to progressing.

Meanwhile there is help available. All qualifying retail, hospitality and leisure businesses in Wales with a Rateable Value of less than £500,000 will obtain a 12 month business rates exemption and businesses in Wales which qualify for Small Business Rates Relief will be eligible for a grant of £10,000. For retail, hospitality and leisure businesses with a rateable value of between £12,001 and £51,000, you may be eligible for grants of £25,000 per property.

I trust this article has been helpful to both landlords and tenants. Collaboration must become the first and crucial priority for both parties, if they are to negotiate these dangerous and unchartered waters safely.