The level of uncertainty in the midst of the COVID-19 pandemic remains at its peak. With a number of premises forced to remain closed in the current lockdown (particularly in the retail and hospitability industries), this triggers inevitable concerns between landlords and tenants about rent payments and rent reviews.
The first quarter rent payment date of 2020 passed on 25 March only days after the lockdown was imposed and the next quarter date on 24 June is creeping up quickly. The reality is that rent review dates in a lease typically fall on one of the quarter dates and so, as the June quarter date approaches, what is the likely impact of COVID-19 on impending rent reviews and what options do the parties have available to them?
It’s fair to say that in many sectors the lettings market is not going to be as buoyant as it was before lockdown. Tenants may well argue that premises are in much less demand now and so rent should be reduced on review. However, if a lease provides for an upward-only rent review then a landlord can rest assured that any depressing effect upon rental values by COVID-19 will not result in a reduction in the rent payable. Most leases provide for a rent review to be based on the “open market”. Whilst there might be some credence to a tenant’s argument that the market will take time to recover from the economic and social impact of the pandemic, in reality it is more likely to be viewed as a short-term crisis and should not necessarily impact the longer-term assessment of the open market rent, particularly when the next rent review date is not for another 5 years typically.
How much weight will a tenant’s argument have that its use of the premises is currently unlawful if, for example, it is in the retail or leisure sector? In these circumstances it would seem unfair for a tenant to be contractually committed to a potentially upward-only rent review when its use is currently prohibited under UK law. However, it is a common assumption in a rent review clause that the premises can be lawfully used for the permitted use. Where this assumption is included, a landlord can rely on this to circumvent a tenant’s argument that the rent should reflect the fact its use is currently unlawful. Landlords and tenants should therefore check the rent review provisions in their lease very carefully and seek professional advice.
As an alternative to facing a difficult rent review discussion in the present time, landlords may wish to consider negotiating rent concessions with their tenants in return for deferring the rent review date to a time when the financial impact of the pandemic is likely to have subsided. In some cases, it could cost more to approach a rent review now with a headstrong ‘enforcement’ strategy rather than negotiating short term measures whilst in this state of unpredictability Some practical concessions that could be negotiated are deferment of rental liability, a change to payment in arrears, a change from quarterly to monthly payments, a rent-free period, a reduction in rent or a change to a turnover-only rent. There will of course be a negative financial impact on landlords who agree a rent concession although this may not be as detrimental as a rent review carried out in these uncertain times without the appropriate protections.
Now is the time for landlords and tenants to consider proactive discussions with one another before the next quarter date and seek professional advice.
Please do get in touch with us if we can be of any assistance on these matters.
Andrew Steele