This article summarises some of the potential areas of concern for landlords and tenants.
Break Options: Pre-condition to provide vacant possession or deliver up occupation
Break options which require the tenant to provide vacant possession or deliver up occupation of the premises as a pre-condition to the operation of the break are likely to be affected by the COVID-19 restrictions, especially if the break date lands during or shortly after a mandated social distancing period.
Both forms of pre-condition require a tenant to clear the leased property of furniture and people in order for the break to operate. A vacant possession obligation is far more significant and may necessitate substantial works to the premises. These conditions must be strictly complied with in order to operate the break.
In the current climate, ensuring staff have vacated on the break date should not be a problem, but issues could arise when a tenant has to do works to the premises or remove furniture but cannot do so or it is materially more difficult to do so due to COVID-19. These issues may include restrictions on access to buildings, difficulties in instructing contractors and difficulties in accessing materials.
Tenants should consider taking the following steps now:
- Check what the pre-conditions are to the operation of any break right
- Consider seeking an agreement with the landlord about what works need to be done and by when
- If no agreement can be reached with the landlord, decide whether the operation of the break right is required or, if it is a rolling break right, can it be delayed until after the works can be completed
- Take legal advice on other more significant options, such as making an application to Court.
Rent Review
- As time is usually stated ‘to not be of the essence’ in rent review clauses, if a party chooses to delay a rent review in light of COVID-19, this should not prevent them triggering the review at a later date.
- Generally, delayed reviews take effect retrospectively and rent (both market and RPI) is valued at the relevant review date.
- In the case of a review which should have taken place before the COVID-19 outbreak, any subsequent effect of COVID-19 on the market should be disregarded. Therefore delaying a review is unlikely to be prejudicial to a landlord’s position, unless there are concerns about the tenant’s future solvency.
- In relation to those rent review dates which fall within or shortly after the COVID-19 restriction period, there is likely to be a reduction in rental levels assessed at the rent review date. For upwards only reviews, this will lead to a nil uplift but, where the review is upwards and downwards, it may lead to a substantial reduction in rent. Tenants may consider that it is prudent to seek to trigger and progress a rent review to ensure that this reviewed rent is set at the earliest opportunity.
- Tenants should also be aware that usually any rent uplift which results from a delayed review are payable immediately in arrears, and often with interest. It may be in a tenant’s interest to trigger a review as soon as possible, particularly if this is likely to result in a modest or no uplift in rent.
Landlord and Tenant Act 1954
Assessment of Rent
- Rent assessments under the 1954 Act do not have to be ‘upward only’ as is the case with most rent review provisions. The assessment of rent is as carried out as at the date of the new tenancy which is 3 months after the renewal hearing.
- There is, therefore, potential benefit for tenants in seeking to push on with renewal proceedings so that the assessment of rent is during the COVID-19 restrictions and/or the inevitable period of economic adjustment after the restrictions are lifted as it is likely to lead to a reduction in rent payable under the renewal lease.
- For landlords, it is likely to be beneficial to seek to push out any possible renewal hearing date as far as possible in the hope that rental levels will have recovered.
Interim rent
- Where a tenant takes a renewal lease under the 1954 Act, interim rent is the rent payable from date of the termination of their existing tenancy until the date of grant of a renewal tenancy.
- The general rule is that the interim rent will be the rent payable under the new tenancy. However, this does not have to apply where rental market conditions change substantially during the interim period.
- Clearly, COVID-19 is going to substantially change the rental market for at least the next few months. If rental levels recover by the time that any renewal lease is granted, tenants may seek to argue that the market fluctuations caused by COVID-19 should have the effect of reducing the interim rent payable.
- Satisfying the requirement for being in occupation of Premises to retain security of tenure
- Tenants are only entitled to security of tenure under the 1954 Act if they satisfy certain conditions, one of which is that they must occupy the premises for the purposes of a business. Timing is critical – they must be in occupation on the contractual expiry date of the lease. Occupation implies a physical presence and control of a premises, but what happens when a tenant cannot occupy a premises due to COVID-19?
- Tenants should be reassured about this issue. Provided they been in occupation up to the time when COVID-19 became a serious concern, it is very likely that the occupation requirement will be satisfied.
Dilapidations
- There is nothing in the Coronavirus Act 2020 or in the government guidance which prevents landlords pursuing a terminal dilapidations claim against a tenant in respect of outstanding breaches of covenant when a lease comes to an end.
- Tenants should still seek to ensure that they hand the premises back in accordance with the yielding up covenants in their lease - commonly this will be in repair, decorated and with tenant’s alterations removed. It is also common for a tenant to be required to hand back the premises with vacant possession, even where this is not a condition of terminating the lease.
- Tenants will therefore need to consider carefully what works will be required to comply with their yielding up covenant, and whether it is in fact possible to carry out these works where premises are closed or contractors will struggle to comply with social distancing guidelines and/or obtain materials.
- Whether the COVID-19 restrictions provide any grounds to argue that these works do not need to be done will depend on the wording of the individual lease, but in many cases the tenant may still be liable even if their practical ability to complete the works has been materially affected by the restrictions.
- Conversely, a landlord’s ability to claim for loss of rent during the period while works are done may be affected if the COVID-19 restrictions mean that the premises could not practically be re-let in any event.
The COVID-19 restrictions are affecting many aspects of landlord and tenant relationships. Landlords and tenants should seek legal advice on the potential impact of COVID-19 on their position in lease renewals, break options, rent reviews and dilapidations claims to ensure that, where appropriate, they are taking advantage of or mitigating this impact.
This article was written by Chris Preston. If you have any questions or want to discuss this further, please contact Chris Preston or your usual Burges Salmon contact.