Commercial rent disputes specialists Chris Hill and Greg Barnbrook provide some insights below for landlords and tenants on how to reach a resolution.
Is the rent really still due?
Many tenants have either been permitted to pay some, or entirely unable to continue to pay any, rent due under their leases since the outbreak of COVID-19. For some, the world being turned upside down along with a raft of government assistance measures has led to a belief that rental liabilities are surely not due and therefore some form of rental concession is expected.
However, in the vast majority of cases (if not all), rent in commercial leases will continue to be payable in full. Whilst in the early phases of the outbreak there was a great deal of attention given to arguments for why rent might not be payable (including suggestions of frustration or force majeure), currently there is no court decision or governmental legislation that has changed the position. Whilst it is still possible for such a case or authority to emerge, thus far such cases have failed in the courts and it is generally now accepted that such arguments will fail in the future. Even if an authority does emerge that rent (or full rent) is not payable under the terms of a particular lease, it is likely to be confined to limited circumstances or the specific wording of a specific lease.
The government’s published “Code of Practice for the Commercial Property Sector” seeks to encourage an open dialogue between landlords and tenants. Tenants are encouraged to pay what they can and be as transparent as possible regarding their financial position. Landlords should also provide support wherever possible. However, the Code is voluntary and does not change the liabilities or obligations of landlords or tenants. In our experience, it has not had much impact in practice.
Can insurance help?
Many tenants will have the benefit of business interruption insurance policies. Whilst some tenants initially had claims declined by insurers in the early stages of the crisis, the position has materially changed with the Supreme Court’s decision in The FCA v Arch Insurance and others making these claims considerably more likely to succeed. Where cover was in place, tenants are encouraged to re-visit their policies or such claims made.
Separately, there has been some suggestion that the landlord may be able to claim for lost rent against its building insurance policy. However, the vast majority of buildings insurance policies (covering physical damage caused by fire, flood, and other similar risks) are not designed to cover the pandemic outbreak and the outbreak will generally not have caused damage to the building itself. For that reason, such policies are highly unlikely to assist.
Why are so many rent concessions being agreed?
Many landlords and tenants have agreed rent concession agreements, but it is more important to recognise that there are a multitude of different circumstances lying behind each and every concession arrangement – depending on the business, the company, the location and identity of the respective parties.
In some cases, the landlords can afford to grant concessions and are willing to do so in light of the wholly exceptional circumstances.
However, for other landlords, rent may be their main source of income and the lease could be highly leveraged with onerous lending obligations behind them. For those landlords, the expectation that they can easily afford and should be willing to offer large reductions in rent has become a source of disagreement and even ill feeling between parties. The psychology behind negotiating rent concessions is a very important theme of recent disputes we have been dealing with.
There are landlords who have concluded that it is in their own best long-term interests to agree to concessions and re-gears. They may conclude that rental concessions are necessary to allow the tenant to survive in the long term and without assistance, and that the landlord is possibly only contributing to the demise of the tenant — an insolvency process, empty premises, liability for business rates and granting lengthy rent-free incentives as and when new tenants are found.
Understanding the commercial reality of the situation
We have found that, whilst many parties are reluctant to disclose sensitive financial information to their landlord or tenant, this is often a fatal barrier to constructive discussions. This is a new situation for landlords who have previously not had to ‘negotiate’ for payment of their rent. Many landlords do not enjoy the prospect of having to invest significant time in being persuaded that a concession is not just desirable but completely necessary – failing which the tenant will enter into an insolvency process and leave the landlord with a worse outcome than if it accepted.
To have the best chance of persuading a landlord that a particular rent concession really is needed, we encourage the early exchange of detailed and persuasive financial information and forecasting to demonstrate to the landlord that, but for a rent concession or re-structure, the outcome will be worse than without it. We have found that the failure to agree to such exchanges of information has led to landlords not being persuaded that concessions are desirable, rather than critical to the ongoing viability of the tenant.
These sorts of discussions often need underlying trust and confidence between the parties that the information provided is complete and accurate. An absence of this trust is a further barrier to constructive conversations.
Is there an answer?
No, not a straightforward one. Each situation will have its own particular blend of circumstances as to what is appropriate, fair and affordable and even then, it’s a question of personalities and each party’s willingness to reach a particular deal.
Many of the disputes about rent we are seeing are the product of parties failing to approach the rental liabilities in a sufficiently serious, timely, transparent and genuinely constructive manner. There are some situations where the parties might never agree on what is appropriate, but we believe that the majority should. Constructive conversations taking into account the above points are encouraged. If that is not enough, then, whilst unusual for payment of rent, possibly the assistance of a good mediator will provide the right medium for a breakthrough between the parties which ends up being in both of their interests.
If none of those things are successful, the courts have remained open to deal with claims for rent, and we have had to assist in such claims. They are, however, taking longer than before to progress and the further delay and investment of costs can be problematic. With the expiry of moratoriums on enforcement action due to end at the end of March, we are regrettably expecting a number of further disputes to come to the fore.
If you have a rent dispute with your landlord or tenant, have been unable to resolve it, need advice on your rights, remedies available and/or would like some assistance with reaching an outcome, (including possibly with the assistance of a mediator), please get in touch with Chris Hill or Greg Barnbrook using the below details.