WHAT ARE SOME OF THE CONSIDERATIONS THAT LANDLORDS SHOULD BE THINKING OF AS THEIR TENANTS START TO RETURN? NANCY RYAN INVESTIGATES
In accordance with government guidelines, the lockdown restrictions currently in place are beginning to ease and many will be wondering what the ‘new normal’ is going to look like when we are all able to get back to work or to visit retail spaces again.
Whilst the exact details of the guidelines are constantly changing, it does appear at present that more and more commercial and retail space will be ‘open for business’ over the coming weeks and months.
How is my tenant?
Many commercial tenants will have changed over recent months, both in terms of their financial performance and how they operate their businesses. In the office sector, for example, many tenants will continue to have employees who are working from home as a result of government guidelines or in order to provide childcare whilst schools are not fully operational. As a result, it is likely that a return to 100% occupancy in the office sector is not likely any time soon (if at all in the long term as traditional office-based workers embrace increasing flexibility in the workplace).
Whilst we anticipate that most commercial landlords will have been in dialogue with their tenants over recent months, it will be useful to assess, as lockdown eases, how tenants are physically returning to work and how much space they are in fact using, certainly in the short term.
In the retail sector, it will be interesting to see how tenants perform over coming weeks and months. Whilst many are likely to embrace the initial ability to return to shops and, in due course, bars, restaurants and other retail and leisure spaces, it is possible that those tenants may take some time to trade as well as they have done historically (which may impact in particular upon any turnover rents in existence). Equally, as the government-backed financial assistance measures ease, landlords may start to see an increase in tenants suffering financial difficulties.
Social distancing: health and safety issues
Whilst lockdown measures are lifted, government guidelines in terms of social distancing remain in place. In that regard, while it is ultimately the responsibility of tenants to comply with applicable legislation and guidance in terms of social distancing, landlords will need to be mindful of their obligations to apply social distancing measures for any common parts. This may include implementing additional safety measures such as one-way systems or queuing methods for the lifts, signage within the building about social distancing and ensuring there are adequate supplies of hand sanitiser and washing facilities.
In maintaining those practices in the common parts, it is unlikely that current leases will have specific provision for those costs to be recovered by the service charge, but landlords may want to consider any ‘sweeper’ clauses in the service charges which may provide for such recovery – landlords would equally need to be mindful of the fact that tenants are unlikely to be particularly receptive to service charge increases to cover such costs in these times of financial uncertainty.
Landlords should engage with their tenants to ascertain if they have adopted some of the other measures which the government is recommending, such as staggered working patterns (in terms of employees starting work earlier or finishing later) and alternative methods of commuting. This will help in ascertaining whether they need to open buildings earlier/later (which may impact upon security measures) and whether or not tenants are requesting, for example, additional cycle storage spaces in place of traditional car parking spaces.
Financial matters
“it will be interesting to see how many landlords look to forfeit leases if the moratorium on forfeiture is not extended beyond 30 June. ”
During the lockdown period landlords may have put into place rental concessions / holidays and tenants may therefore be facing a return to work at or around the same time as those concessions end and the June quarter day looms into view.
Equally, the current moratoriums in relation to forfeiture of commercial leases and the proposed moratorium on winding-up petitions will be coming to an end (unless they are extended), as well as the restrictions on exercising Commercial Rent Arrears Recovery at or around the same time as the June quarter day.
It is therefore likely that June and July will see a fresh round of discussions between landlords and tenants about rent and service charge payments, set against the background of the uncertainty regarding whether the moratoriums referred to above will be extended as well as the proposed ability pursuant to the Corporate Insolvency and Governance Bill 2020 for tenants to enter into a moratorium (a temporary ban on certain activities), which can provide companies with breathing space from creditor action. The moratorium is available to UK companies that are, or are likely to become, unable to pay their debts, but where it is considered likely that a moratorium would result in the company being rescued as a going concern. It remains to be seen how many commercial tenants will seek to take advantage of this moratorium and, by the same token, it will be interesting to see how many landlords look to forfeit leases if the moratorium on forfeiture is not extended beyond 30 June.
Landlords will have to be mindful that many tenants who defaulted or sought concessions in relation to the March quarter rent did so in circumstances where those tenants had largely been trading as normal in the first quarter of 2020 – the June quarter day will come around when businesses have almost certainly suffered some kind of financial downturn as a result of covid-19 or have hardly traded at all in the case of certain retail or leisure tenants.
Changes to lease terms
As the lockdown eases, landlords may face requests from tenants to vary their leases in order to cater for both operational and financial changes. Those requests may relate to tenants seeking to defer rent payment or to pay monthly. Tenants may start to request to reduce the space they require as more employees remain at home or, as above, may start to request other measures in view of their employees starting to travel to work on foot or by bicycle or wishing to work more flexible hours: 7am – 3pm, or 11am to 7pm instead of the usual ‘9 to 5’.
Whilst there is likely to be no requirement for landlords to agree to such changes, landlords will need to be mindful of relationships with tenants over the medium to long term. As always, if a landlord is minded to agree to a concession or to vary the lease in any way, it is prudent to document this properly to avoid any uncertainty arising in future.
The future
It is quite feasible that the days of the office worker commuting by car to an office for a ‘9-5 day job’ are unlikely to return any time soon, if at all.
It is vitally important therefore that landlords engage with their tenants as their working needs change – landlords, more than ever, will need to be forward-thinking and adaptable as tenants are increasingly likely to want to change the manner in which they occupy commercial space, pay their rent, travel to and from the workplace and also change their hours of work.