Commercial rent income: issues for landlords in light of COVID-19

With pressures on cash flow mounting, many commercial tenants may seek flexibility from landlords on rent payments. This article summarises the implications for landlords and tenants

25 March 2020

The economic upheaval created by COVID-19 has put businesses into a very uncertain position. Many commercial landlords will be acutely aware of pressures on the cash flow of their tenants and, in turn, of the pressures on their own businesses.

Tenants have been approaching, and will continue to approach landlords over the coming days, weeks and months with requests for relief from paying rent in an effort to ease this pressure. With the March quarter falling today (25 March), most commercial landlords will face the risk of having tenants that seek to withhold rent, or pay a reduced rent to preserve cash flow.

In the longer term, both parties should also be aware of their position in terms of outstanding or future rent reviews and turnover rent provisions.

Quarter Day Rent Payments

Most commercial leases require tenants to pay rent on the usual quarter days. Although tenants may well have enough cash to cover the March quarter rent, they will no doubt be looking ahead to the rent payable for the June quarter. These concerns have already led to many large retail outlets approaching landlords with requests for rent relief. For example, Arcadia Group have requested a significant rent reduction, with B&Q and Superdry reportedly doing the same. Others such as Debenhams, H&M and Sports Direct have requested rent free periods of up to five months and, in the already hard hit casual dining sector, Carluccios are seeking a three month 'rent holiday'.

These kinds of requests will likely become much more common along with questions about relaxing rent payment structures e.g. requests to pay rent monthly, or suspension of turnover rent provisions (see below).

Rent Reviews

The changes experienced in the market over such a short period of time will no doubt leave landlords and tenants considering the best approach in relation to rent reviews. Provided that current passing rent is sufficient to cover their overheads, landlords with upcoming rent reviews may prefer to defer the review to a (hopefully) more stable period when they are more likely to get full tenant engagement. Almost all rent review clauses state that ‘time is not of the essence’ (although it is worth checking), so there should be no significant prejudice to a landlord in agreeing not to trigger a review.

It is also generally the case that the valuation of rent will take place on the review date defined in a lease, regardless of when the review is triggered. This means that rent reviews (both market and RPI-linked reviews) that fell before the COVID-19 outbreak started to affect the economy will still reflect the pre-COVID position.

In almost all cases the tenant will remain liable for the pre-review rent if the review is not triggered. However, landlords and tenants should bear in mind that usually any rent uplift which applies following a delayed review will be payable immediately in arrears, and often with interest.

Turnover Rent

Turnover across many sectors of the economy has obviously been seriously affected by COVID-19, and going forward this may result in little or no turnover rent falling due. Where this is not automatically the case, many tenants who are subject to turnover rent provisions are seeking rent holidays. This is particularly relevant where turnover rent is based on several months’ historic trading or where there are deeming provisions which kick in if premises are not being utilised for trading.

While such deeming provisions are not common, we have seen examples of these in both retail and restaurant/leisure leases where the lease will assume a deemed turnover based on historic trading if the premises are closed or trading is suspended. These are most commonly intended to cover periods while tenant redevelopment works are underway. However, it is worth checking whether enforced closure might engage such provisions, even where it is unlikely that a ‘keep open’ covenant would be enforceable.

Protection from Eviction

The government has now announced plans to provide commercial tenants with protection from forfeiture over the next three months. During that time landlords will be unable to take any action to forfeit a lease for non-payment of rent. However, this does not waive tenants’ obligation to pay rent during the three month period, so if not paid it will remain due and may be recovered when these emergency measures end. The government has also made clear that it is monitoring the impact on landlords’ cash flow during this time.

What should landlords and tenants be doing?

As well as considering their direct relationship with their tenant, landlords should also be careful to consider their position under any loan facility or headlease before agreeing to vary the terms of leases to relax rent provisions. Having said that, these are very challenging times and lenders may be willing to accept the pressures that tenants are under. Where possible, landlords should do the same, particularly in light of the proposed suspension of forfeiture rights.

It is crucial for parties to communicate proactively to find solutions, and we would suggest that the above issues form part of both parties’ considerations. However, where landlords are willing to accommodate changes to rent payments, or other lease provisions, it is crucial that the terms and duration are formally documented in the interests of clarity for all parties.

For more information or if you wish to discuss any of the above in more detail please contact James Sutherland or Lucy Redman.

Key contact

James Sutherland

James Sutherland Partner

  • Head of Real Estate Disputes
  • Dispute Resolution
  • Professional Negligence

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