Coronavirus - lease management for business landlords

In other articles we have highlighted the rent issues for business landlords to consider as a result of the emergency Coronavirus legislation and the effects of Coronavirus on business landlords and tenants – 'fake news' …and what to do when the crisis is over. 

We now explore some of the Coronavirus effects on other events in the landlord and tenant relationship.

Gamesmanship and the Landlord & Tenant Act 1954

As many readers will know, a tenant of business premises has a statutory right to apply to renew its tenancy under Part II of the Landlord & Tenant Act 1954, unless the parties had agreed before the lease was granted that the right should be excluded. Whilst many leases are renewed by agreement, the right exists to apply to the County Court for a determination if there is no agreement. These applications are routine, but since they involve both statutory and court procedure, there is scope for both parties to exploit the procedures for tactical advantage.

Watching the market

We have recently seen examples of tenants hedging between uncertainty over their space requirements, and the likely direction of market rents. Therefore, in situations where the 1954 Act applies, we have seen tenants requesting extensions of the deadline for making renewal applications to the County Court, claiming that Government restrictions on movement etc. prevent negotiations proceedings; prevent documents being signed; or prevent court applications being issued. None of these factors is likely to be credible, and the last of them is not true anyway.

Controlling procedure

Further, the 1954 Act procedure has always given tenants opportunities to speed up or slow down the process to suit their own ends, and it is to be expected that those opportunities will be exploited to their full effect. They had been curtailed somewhat in London by the referral of unopposed renewals to the First Tier Tribunal, which had been operating an accelerated scheme aimed at achieving a final hearing within 20 weeks of service of applications. However, the First Tier Tribunal has suspended all proceedings until 29 May at the earliest and, again, this is likely to create a backlog after the crisis which will make the 20 week target impossible.

Delaying service of claim form

It has always been open to a tenant to issue a court application for a new tenancy, and then withhold service of the claim form. This can achieve a delay of up to four months, being the period of validity of the claim form. The only counter-tactic which a landlord can exercise in these circumstances is to send a notice to the tenant requiring service of the claim form within 14 days (rule 7.7 of the Civil Procedure Rules). Thereafter, landlords would be well advised to force the pace of proceedings so far as the process will allow – which in the present circumstances may not be very fast.

Landlord taking control

The 1954 Act procedure is principally focused on the tenant's right to apply for a new tenancy. It is initiated by either the landlord or the tenant serving on the other one of the statutory notices (under s.25 or s.26). The notices may be of between 6 and 12 months in duration, and so there may be a tactical advantage to whoever serves first. By the end of that period, either the tenant must have made an application to the court for a new tenancy, or the parties must have agreed in writing to extend the deadline (see above). 

However, it is possible for a landlord to take control of the process by making its own application to the court to determine the terms of a new tenancy. Whilst the tenant may withdraw from the process and thus terminate its tenancy, a landlord's application would force the tenant's hand, potentially to the landlord's advantage.

Tenant break clauses

Naturally, tenants wanting to reduce rent liabilities are very likely to exercise break clauses. This can be dangerous territory for poorly advised tenants. 

First, break clauses are construed strictly. Dates and deadlines are absolute, and methods of service of notices must be adhered to. Many tenants interpret requirements incorrectly, or make assumptions without checking what their leases require. Mistakes can be fatal to the validity of the break, so a lawyer may need to check this.

Secondly, many leases require that for a break to be effective, the tenant must have paid all the rent, and must give up the premises with vacant possession. Many older leases impose further conditions, such as a requirement to return the premises in full repair. Whist there is some law about it, repair can be a difficult condition for a tenant to comply with.

Whilst there is a general prohibition on leaving one's home at this time under the emergency legislation[1], and businesses are adhering to Public Health England's guidance on reducing transmission of Coronavirus, it will likely be difficult for a tenant to move out fully, and therefore to deliver the required vacant possession. It may be even harder to carry out repairs. Again, this could be fatal to the effectiveness of the break.

A landlord should also check whether there have been any previous late payments by a tenant, which may have attracted interest under the lease. Some break clauses require all payments due under the lease to have been made before the date of the break, and this may include historical interest.

Tenants handing the keys back

It is not uncommon, particularly for tenants of smaller business premises, to try and surrender premises, either by abandoning them, or by handing the keys back. Neither of these unilateral methods is effective to surrender a lease and thereby terminate on-going liabilities. Any landlord faced with this should write to the tenant to make it clear that their actions are not accepted as a surrender of the lease. That said, it may not be commercially worthwhile pursuing a tenant who feels driven to such a step, so it is worth checking before incurring further expense in chasing them.

Insurance and security

Insurance is very often a landlord's responsibility under business leases. Landlords are well advised to check that they have appropriate coverage, and that coverage is not at risk of being avoided because, for example, premises are currently unoccupied by tenants.

Please refer to our article: Coronavirus update – insurance implications of unoccupied premises for more information.

Even if a lease grants a tenancy of the whole of the premises, and thus security would usually be a tenant's responsibility, landlords would also be advised to monitor arrangements, not least because of the possible insurance implications. If premises have been abandoned because a tenant has walked away, a landlord may still take control of security without impliedly agreeing a surrender of the lease. It is however prudent to spell this out to the tenant.

If in doubt about anything, take advice.

If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Andrew Baines, Partner and Head of Michelmores' Property Litigation team.

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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.

 

[1] See the Health Protection (Coronavirus, Restrictions)(England) Regulations 2020, regulation 6