How is the Commercial Property market affected by COVID-19?

As businesses prepare for further amendments to the lockdown restrictions that have been in place since March 2020, commercial landlords and tenants continue to feel the impact of several new measures that have been implemented to provide a safety net to those hardest hit by COVID-19.

In this article we seek to outline some of the ways that businesses are affected, the practical steps that they can take moving forward and the outlook for the future.

Which businesses are affected by lockdown?

As the UK entered lockdown the government, using the powers contained in the Coronavirus Act 2020 and an amendment to the Public Health (Control of Disease) Act 1984, placed restrictions on businesses in several sectors, in some cases requiring them to close their premises. Businesses in the hospitality, leisure and entertainment industries as well as non-essential retail businesses ceased trading, with few exceptions.

It has been widely reported that we will continue to see the relaxation of lockdown measures over the next few months, with zoos, open air cinemas and non-essential shops allowed to open from 15 June. However, these businesses will still be required to follow social distancing measures when they reopen and many are unlikely to be able to offer the full range of services that they were prior to lockdown.

Measures to protect businesses

Due to the severity of the restrictions, the government was quick to implement several measures to allow businesses to weather the storm:

• Businesses in the leisure, hospitality and retail sectors are able to benefit from a one-year business rates holiday for the 2020-21 tax year, and are also able to apply for a cash grant of up to £25,000 per property.
• New permitted development rights have been created to allow businesses such as bars and restaurants to offer a takeaway service without making a planning application. These measures do not supersede restrictions in commercial leases so tenants must communicate with their landlord and inform their local authority prior to offering a takeaway service from their premises.

Some tenants are seeking to negotiate the inclusion of “COVID-19 clauses” into leases. These share similar characteristics to force majeure clauses and can offer tenants significant protection although the inclusion of such clauses in leases is not yet standard practice.

With both landlords and tenants under severe pressure it is important they collaborate. We would encourage both parties to work together on finding solutions that work for both parties.

Restrictions on commercial landlords

We have previously discussed the restrictions place on commercial landlords when seeking to reclaim rent arrears. This article can be viewed here. Below we provide an update on several of these measures:

• Commercial tenants are currently protected from forfeiture for non-payment of rent until 30^th June. We currently await further information on whether the forfeiture ban will be extended;
• The rules regarding Commercial Rent Arrears Recovery (CRAR) were extended so that the minimum amount of unpaid rent that can be due before CRAR can be used is 90 days rather than 7 days as had previously been the case. This regulation applies for the moratorium period on forfeiture (above).
• The Corporate Governance & Insolvency Bill, likely due to come into place in July 2020 and discussed in more depth in our article here, is likely to include provisions to temporarily void any winding up petitions presented on the basis of statutory demands served on tenants for non-payment of rent. Courts are already taking the government guidance concerning this into account.

What measures can landlords take?

Although several of the means to secure unpaid rent are currently unavailable to landlords, it is important to note the right to rent or other payments has not been suspended, only the right to forfeit the lease for non-payment.

As discussed previously in this article, in such an unprecedented situation it would be prudent to attempt to work with tenants on creating a payment plan with a realistic timescale for any rent arrears. In circumstances where this proves fruitless there are other options still open to landlords:

• CRAR can still be used to recover losses from rent arrears as long as there are more than 90 days of outstanding rent and the tenant has not made a partial payment of the outstanding sum.
• Landlords can issue debt proceedings to seek to recover unpaid rent. This is rarely used (due to landlords’ hitherto ability to issue statutory demands and winding-up petitions) and is also a lengthy and costly procedure but the range of enforcement options may help the recovery of rent.
• There are no restrictions on landlords pursuing either a guarantor or drawing down a deposit, subject to the terms of any agreement.
• A costly measure, and one that would not be commercially viable in many cases, would be to apply to the court as an unsecured creditor for the appointment of an administrator.
• Although not securing the funds directly from the debtor, landlords may seek to recover any lost earnings through their insurance. It is important to look at the specific policy.

Each of these courses of action has risks associated with them, and we would encourage any commercial landlord to seek legal advice to be able to make an informed decision based on their own circumstances.

Looking to the future

Although it is unclear what the future holds, we can be sure that there will be no return to ‘the old way’ following any easing of lockdown. There are several measures that we have seen implemented in recent months that look to continue and some sectors perhaps have more cause for optimism than others.

Land Registry restrictions on signatures

Since lockdown there have been difficulties completing transactions due to issues obtaining original signed documents. The Land Registry is currently accepting deeds signed using the ‘Mercury signing approach’, a proposal first put forward by the Law Society in 2009. This procedure permits conveyancers to complete and register transactions on the basis of a scanned signature page without any need for the parties to return hard copies. The signature does still need to be signed in pen and witnessed in person. Although this is a temporary measure it perhaps indicates a move towards this in the future which would undoubtedly speed up many processes.

Easing of lockdown

Businesses are still unclear as to where they stand with regards to lockdown and many fear a second peak later in the year and a return to stricter measures. The government is currently working on a code of practice with business leaders focused specifically on high street businesses and will perhaps point to a way forward out of lockdown. With quarterly rent due for many in June and the moratorium on forfeiture also due to expire before the start of July we can expect further disruption and uncertainty over the coming months.

Market outlook

With the tourism and retail sectors in particular sure to see lower than anticipated revenue for 2020, many landlords are already working with tenants to allow rent-free periods or deferments of rent. Similarly, businesses are likely to reassess their needs for physical office space in light of either a reduction in workforce or a move towards a hybrid of home and office working.

In summary

All businesses continue to be affected by the COVID-19 pandemic and the ongoing lockdown measures. While this article looks to address some of the ways that landlords and tenants are affected, it is meant as a guide only and it is important to seek legal advice to receive guidance that takes into account factors specific to your circumstances.

Ben Madden is a Solicitor in Spratt Endicott’s Commercial Property practice. To discuss this article or if you have any querieis please contact ben at bmadden@se-solicitors.co.uk

*Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.