Coronavirus - lease management for business tenants

In other articles we have highlighted the rent issues for business tenants 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.

Are there cheaper alternatives?

Tenants may wish to hedge between uncertainty over their space requirements, and the likely direction of market rents. Therefore, in situations where the 1954 Act applies, a tenant might want to request an extension of the deadline for making a renewal application to the County Court, in order to buy more time.

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 those opportunities can 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. However, tenants should be aware that there is a facility for the landlord to counter the tactic by sending a notice to the tenant requiring service of the claim form within 14 days (rule 7.7 of the Civil Procedure Rules). 

That said, given the effects of the emergency measures on the Court Service, the timetable for proceedings after service of the application may not be very rapid.

Make a tenant's application first

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). 

Tenants should be aware that 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. However, the landlord cannot make its own application, if the tenant has made its application first.

Tenant break clauses

Naturally, tenants wanting to reduce rent liabilities may wish to exercise break clauses.  Tenants should beware of the traps here.

First, break clauses are construed strictly. Dates and deadlines are absolute, and methods of service of notices must be adhered to. Often notices must be served some months in advance of the break date. 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 may prove 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.

There are no easy answers here, but the practicalities must be considered carefully.

A particularly harsh trap lurks in the issue of interest on late payments. 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 on delayed payments of rent, service charge or insurance contributions. The landlord may not have invoiced for the interest, but it may be due anyway. Check, and if in doubt, overpay.

Insurance and security

Insurance is very often a landlord's responsibility under business leases, but tenants may have their own insurance for stock or equipment. Tenants would be 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. Furthermore, tenants should not assume that their landlords have appropriate insurance coverage. Landlords should be asked to check, and to confirm cover for unoccupied premises if that is relevant.

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

If premises are unoccupied, a tenant should nevertheless make sure that they are adequately secured.

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