Since the start of this pandemic I’ve had countless conversations with both landlord and tenant clients about the non-payment of commercial rent and, linked to that, issues relating to forfeiture and surrender, or as some of my clients have referred to it, “kicking them out”, or “walking away”.
There is a common theme: uncertainty about what lies ahead for the property market and businesses in Cornwall. This uncertainty has created doubt and both landlords and tenants are finding it hard to plan for the months and years ahead.
The difficulty is that as we’ve not experienced anything like this before, no one really knows what is going to happen. Lawyers, accountants, and property agents all seem to have a different view. Inevitably, there will be casualties in this recession, but there will also be success stories.
What is clear is that in most cases both sides of the camp will benefit from a degree of collaboration, especially with the moratorium on forfeiture coming to an end on 30 September 2020 (unless extended by the Government), the tailing off of the Government’s furlough scheme, and the September rent quarter day all approaching.
Collaboration in practice
So, what do I mean by ‘collaboration’? This could include agreeing to defer rent and other financial concessions. I have seen several tenants, particularly in the retail and hospitality sectors where rent recovery levels have been reported to be well below 50%, request rent deferments or even rent-free periods during their existing leases. These tenants have included established and successful businesses.
Landlords have agreed to forego upwards-only rent reviews and have taken a more relaxed approach to breaches of repairing covenants. Some have, where the tenants have access to labour, reduced or waived rent in exchange for works being carried out on the premises over and beyond the tenant’s obligations under the lease. However, collaboration can and should, in my opinion, be much more than this.
The full potential of collaboration
With the right type of property, tenants should consider things like whether there is scope to sublet or subdivide part of the property. Some businesses can be complementary to one another and can help to mutually drive success. For example, a surf hire/lesson shop could trade alongside a surf store selling equipment and clothing. The same kind of approach could work between professionals too. For example, a design agency sharing office space with a PR firm.
There may well be restrictions on subletting within a lease, but landlords should consider the ‘long game’ when approached by their tenants. There could be a long-term financial benefit from relaxing such restrictions in order to keep the premises occupied. Of course, any changes should be documented and recorded formally.
The same may apply where a tenant’s business may wish to evolve into something completely different. The landlord and tenant may be able to work together to secure any required planning permission which could assist the operational needs of the tenant in the short/medium term. Again, this may assist the landlord in the long-term because they may be able to attract a range of different tenants. Most modern leases will have a ‘user’ clause, setting out what the premises can be used for. Subject to any planning requirements, landlords should also be encouraged to take a pragmatic view on variations to the lease to facilitate change.
There is no “one-size fits all” solution
My message is: be practical, pragmatic and in some cases, patient. Litigation is and should also be a method of last resort. Do pick up the phone to your landlord or tenant; do be open and honest about your respective positions; and do try and think about the bigger picture.
In these unprecedented times, it will not be in either parties’ interest to adopt an extreme position. In most cases it will not be appropriate for landlords to pursue every penny owed if their tenant is struggling, and equally it may not be appropriate for tenants to refuse to pay the rent. Stand-offs, threats, and a refusal to compromise will only end up damaging both parties and the landlord and tenant relationship, which is often undervalued. A balance needs to be struck by working together and perhaps by thinking outside of the box.
When the assistance from lenders and Government schemes dries up, what do you want to be left with? What is the landscape of the commercial property sector really going to look like?
Taking the retail sector as an example (which already had its challenges prior to Covid-19), are we going to be left with ghost towns littered with empty commercial units, or are we going to see the high-street transform and become destinations that are so much more than simply shopping destinations?
Whilst these are understandably concerning times for many, there are opportunities out there and, more often than not, a problem shared is a problem halved.
Ben Jones is a partner in Stephens Scown’s property litigation team, based in Truro. He can be contacted on 01872 265100, email email@example.com or via www.stephens-scown.co.uk.