Our team: Kirsty Smith
Much has been written about the effect of Covid-19 on the performance and enforcement of contracts. The Government has recognised that parties to some contracts may find it difficult or impossible to perform those contracts in accordance with agreed terms, as a result of the impact of the pandemic.
In the context of commercial landlords and tenants, much of the focus has understandably been on a tenant’s ability to pay rent. In a bid to mitigate the effects of Covid-19 on tenants who cannot pay, the Government has, through a series of measures, added weapons to a tenant’s armoury in the face of a landlord’s demand for rent:
These measures apply in the corporate not personal insolvency context.
The combined effect of this is that there are means by which tenants can encourage their landlords, whose teeth are being restricted by the Government, to agree terms for rent concessions or deferment where necessary.
If a tenant anticipates that it will be unable to continue paying the rent or will no longer require the premises, it should check its lease to see whether it has any right to bring the tenancy to end by, for example, exercising a break right in the lease.
Alternatively, in a falling market where premises are over-rentalised, tenants with an upcoming break right may consider exercising that right as a tool to negotiate favourable terms for a new lease of the premises with their landlord. The same can be said of tenants who can initiate a statutory renewal of their business tenancy.
Tenants should note that leases usually require all rent payments to be up to date in order for the break to be effective. If there are any imminent break dates, then any rent concessions or deferments will need to be considered, otherwise there may be uncertainty as to whether the breaking party has validly exercised the right.
One less well trodden topic is the effect of Covid-19 on a tenant who is closing its premises and is exposed to a landlord’s claim for damages at the end of the term. In those circumstances, a tenant would be well advised to consider the implications of Section 18(1) Landlord and Tenant Act 1927 (“the Act”) on a landlord’s claim in the current climate.
Section 18(1) of the Act limits the damages available for breach of a repairing covenant or a covenant to leave premises in repair on termination of a lease. It provides that damages are limited to the diminution in value of the landlord’s reversion caused by the breach/disrepair. Where there is no difference in value resulting from the disrepair, the landlord will recover nothing.
A tenant could argue that because it cannot access the premises, because lockdown is still in place (in most sectors), and as social distancing will apply when lockdown is eased, that will effect the potential income the landlord could obtain from the premises. In turn, the diminution valuation under the Act will be effected. The tenant may argue that the landlord wouldn’t seek to do the works immediately, it would be money ill spent until there is a proven market where the landlord can re-let the property, and/or that the landlord would seek to temporarily let the premises for any use it can get, negating the need for any fit-out or repairs.
It’s time for your landlord to be reasonable.