Follow the trend lines, not the headlines
A lot has happened in the commercial property space in the last 18 months; a stream of new laws have been introduced with many businesses trying to adapt to the changes as a result and amidst an unprecedented level of rental arrears in the UK.
The headlines may say one thing but what are the trends in the market.
Take a look at the key trends below:
- Heads of Terms- in the case of WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft mbH, a "COVID Rent Suspension Clause" was acknowledged by the court for the purpose of a lease renewal under the Landlord and Tenant Act 1954. We learnt that even if a tenant is deemed to be essential retail but suffers a significant loss of business as a result of a reduction in footfall, this would be an acceptable trigger for a pandemic rent suspension clause. The judgment highlights the dramatic fall in retail rents in many shopping centres, as well as the desirability to now include a rent concession pandemic clause in new leases so that landlords and tenants can share the pain of any future lockdowns.
- Businesses continue to scrutinise their other property outgoings - some are insisting on monthly rental payments, as opposed to the usual quarterly terms. However, in some cases, the additional administration costs of collecting on a monthly basis may be counter-productive. Other businesses are continuing to cap service charge payments or request rents inclusive of service charges and insurance.
- Turnover rents - this is a type of rent that is dependent on a tenant’s turnover so where a business produces a higher turnover, the landlord will receive a higher rent (and vice versa). We are seeing more and more turnover rent provisions in commercial property leases as tenants want to ensure their businesses survive the unpredictable market conditions and landlords are seeking to keep their properties tenanted. Some have found this to be too much of an administrative burden given the reporting nature of the provision. Other landlords have not been able to utilise this mechanism as certain lenders will not accept fluctuating rents. Turnover-only leases have been imposed under the terms of some recent CVAs, such as the All Saints CVA in June 2020.
- Terms of leases - the trend continues for more commercial leases with a shorter term with a break clause. Now more than ever, businesses need flexibility so that they can adapt to changing circumstances or commercial trends.
- The moratorium on commercial forfeiture which has now been extended to 25 March 2022 in the UK (30 September 2021 in Wales) has meant that it is harder for landlords to recover arrears in the usual way (through bailiff-led evictions or under CRAR unless 554 days’ worth of rent is outstanding). The introduction of the Code of Practice for commercial property relationships encourages landlords and tenants to work together and to reach an agreement on arrears but the code itself does not have teeth as it does not carry any mandatory weight. Notwithstanding that, many have taken the difficulties in their stride and are learning the art of negotiating.
- In addition, the Government's proposal to ring-fence pandemic arrears in order to protect those tenants made most vulnerable due to trading conditions, via binding arbitration, is also encouraging parties to come to the table. It’s not clear whether the introduction of binding arbitration will mean that the balance of power will now be re-jigged in favour of tenants given that case law to date, on the whole, has been geared more in favour of landlords, but this is all the more reason for parties to agree on matters now on their own terms rather than risk an adverse decision being made in arbitration later this year. The impending arbitration process will only apply to pandemic arrears, but there is every chance that the actual legislation (once published in the Autumn) may include various exemptions so that some tenants may still be at risk of action for pandemic arrears. It is all speculation at this stage.
- There may be a moratorium in place but landlords are not prohibited from starting court proceedings for rent recovery. Landlords can normally include their legal costs in such actions making this more attractive. We have seen many landlords take this route with unwilling and unengaging tenants. Landlords can also forfeit leases on the basis of breaches other than non-payment of rent.
- The moratorium on serving statutory demands and issuing winding-up petitions are both extended to 30 September 2021. The costs of going through the insolvency process are high and landlords taking this route will need to consider no rent vs low rent and whether they can survive with empty premises and be liable for business rates. We don’t see this becoming a trend particularly as a further extension to this deadline has not been ruled out.
It's undeniable that the pandemic has stifled a lot of businesses but there are a plethora of developments surfacing which legal advisers will need to be prepared to advise upon.
If you have any questions about the content in this blog or require support for your business, please contact a member of our Property Litigation team.