Should tenants be negotiating Covid-19 clauses in their leases?

Specialist Commercial Property Solicitor, Natasha Narad discusses the impact of Covid-19 and whether tenants should be negotiating Covid-19 clauses in their leases.

The coronavirus pandemic has led to many businesses having to periodically cease trading. Government or local authority imposed measures, which are being used to tackle the spread of Covid-19, essentially mean tenants may not be able to use their premises, but they still remain liable for the rent.

Going forward, perhaps when tenants are negotiating new leases or even renewals of existing leases, they should request a provision dealing with the suspension of rent in the event they are forced to close.

The rent suspension would work if the premises are asked to close by either the local authority or the Government as a measure to prevent further infection risk of coronavirus. The date in which the lockdown or closure is to take place, triggers the suspension and the tenant for this period would not need to pay the rent to the landlord. Once the measures have come to an end, the rent liability resumes.

However, whilst the above is a practical solution for the tenant, landlords are unlikely to easily agree. During the most recent lockdown (5 November 2020- 2 December 2020) businesses could apply for the Local Restrictions Support Grant. The sum received was calculated in accordance with the rateable value of the property, up to a maximum of £3,000.00 for each 28-day period.

Landlords can request any funds received under the grant should be paid to them as rent, but in many cases the rent is much higher. With utility costs also payable, it does not seem likely there will be enough to cover all property related bills, even with the reintroduction of the furlough scheme to reduce staffing costs.

It is then in the tenant’s best interests to try to negotiate a Covid-19 clause, so the rent during the relevant period is not payable. Unlike a normal rent suspension clause in the lease, where the landlord is likely to recover the missing rent from their insurer, they probably are not covered for closures relating to a pandemic. It therefore is between the landlord and tenant to negotiate what cap, if any, there will be on the rent following a government or local authority call to close. Mentioning the limitations on the grants should help the tenant to secure some form of rent concession, as a landlord would still prefer a tenant who is able to reopen once a lockdown ends, instead of one who may be facing insolvency action. If a landlord still pushes back on a full rent suspension, then it is also worth seeing if a reduction in rent can be negotiated instead. Covid-19 clauses can still be used to realise this in the lease and it would provide the landlord and tenant some comfort that payments, albeit reduced ones, are still due. Agents would be able to provide further advice during the negotiations. Solicitors can then ensure the correct provision is drafted into the lease to reflect what has been duly agreed between the parties.