Commercial tenants in financial difficulty: what options are available?

In the current economic climate it is not uncommon for commercial tenants to experience financial difficulty. Tenants may want to address the issue with their landlord to try and come to an agreement that works for both parties before more drastic actions are taken. In this article, our property disputes partner Chris Hill outlines what options are available to tenants renting commercial premises who are in a financially precarious position.

Can the tenant claim rent relief?

Whilst it might seem unfair, in the vast majority of cases, the rent remains payable and in full.

The issue received a great deal of attention during the Covid-19 pandemic and lockdown periods. However, even then, after a series of legal challenges (including arguments based on force majeure and failure of consideration) the courts confirmed that the rent remained payable.  The key legal case in this regard was the Court of Appeal case of Bank of New York Mellon -v- Cine-UK Limited and Picture House Cinemas Limited v London Trocadero (2015) LLP [2022].

What government support is available to tenants?

The UK Government is no longer providing any assistance targeted directly at the question of rent obligations under leases.

Shortly after the Covid-19 outbreak, the Government implemented a series of measures designed to help businesses affected by the pandemic. These included: (i) moratoriums on landlords taking enforcement action such as forfeiture or winding-up proceedings (ii) Codes of Practice providing guidelines and a framework for landlords and tenants to reach agreement on rent arrears and (iii) an Arbitration Scheme which could result in a write-off of some of the rents due for periods during which businesses were affected by closure requirements.

It is no longer possible to make use of any of these measures, parties are back to the usual position and landlords can enforce payment of the rent as they always have been able to.

What arrangements might be agreeable to a landlord?

Many landlords will now refuse to entertain any dialogue on concessions at all and approaches may simply be rebuffed.

However, there are reasons many landlords appreciate this is a simplistic and counter-productive approach. Landlords may not easily be able to find replacement tenants and it is often in their longer financial interests to work with existing tenants and help them through a difficult period. Landlords also become liable for business rates if premises are un-tenanted, and this is a cost they want to avoid.

In broad terms, anything is possible, but arrangements can include:

• Temporarily reducing regular payments (or a single lump sum discount).
• Allowing more time to pay (now or at the end of the lease).
• Agreeing not to implement a rent review which is going to increase the tenant’s liabilities.
• Moving the traditional quarterly rental pattern to a monthly payment.
• Agreeing to utilise a rent deposit against arrears without (immediately) obliging the tenant to top-up the deposit.
• Extending the term of the lease (in exchange for re-paying arrears during the extended period) so that the tenant has longer to pay and the landlord has a longer period of occupancy.
• Agreeing that a tenant does not exercise a break right (and re-locate elsewhere) in exchange for the tenant staying but on a reduced rent.
• Relaxing restrictions in the lease in areas such as assignments (to dispose of all or part of the premises), sharing the premises (to increase revenue), sub-letting (a third party helps pay the rent), or widening permitted uses of the premises (to possibly diversify revenue streams).
• In an era where multi-occupancy buildings are increasingly common, relocating the tenant to other space owned by the landlord, whether smaller or less expensive may also be an agreeable option.

Tenants will improve their chances of agreement if they communicate early and share suitable trading information which will need to persuade a landlord that some form of accommodation is in both parties’ interests. Agreements should of course be recorded comprehensively in writing and not left to conversations or brief e-mail exchanges.

Tenants should also be conscious that landlords want a simple life and to receive rent with little to no disturbance. Therefore, be straightforward and concise in proposals and dealings. It is crucial that if any arrangements are reached, they must be strictly complied with otherwise landlords will quickly lose patience and soon conclude they may be better off bringing the lease to an end and quickly.

If you have concerns about your commercial tenancy, please contact Chris Hill.