The Office for Budget Responsibility (OBR) has warned that the UK is at risk of slipping into recession if the coronavirus outbreak causes widespread disruption in the coming months.
But what might this mean for landlords and tenants of business premises? Here are 10 issues you might have to deal with:
1. Debt claims – Rent and service charges can easily become unmanageable for tenants during a recession and it can be difficult for a tenant to recover once it slips into arrears. A tenant’s failure to pay the rent will put strain on the landlord’s own financial situation. However, good tenants are worth keeping and the landlord’s approach should take into account the prevailing financial conditions; so for example, forfeiture is unlikely to be attractive to a landlord where there is no market for the premises, as well as risking reputational damage. Rent concession agreements are likely to be much in evidence, although they should be properly documented to protect both parties.
2. Dilapidations – The options available to landlords to redevelop or change the use of their premises are reduced in times of recession, so they are more likely to aggressively pursue tenants for dilapidations when the lease comes to an end. The fact that struggling tenants may have neglected routine maintenance and repairs during the term of the lease will compound the issue.
Damages for loss of rents and business rates that can make up a large proportion of a dilapidations claim will feature more prominently. That said, recessionary conditions can make it more difficult for a landlord to prove its losses are due to the default of the tenant as opposed to the depressed letting market.
3. Landlord’s breach of contract claims – It is not just tenants that get into trouble during a recession. Where a landlord is liable under the lease to provide services it cannot afford, the tenant may need to take matters into its own hands to fund repairs and maintenance or insurance or to manage premises or even take on the freehold itself where a landlord becomes insolvent.
4. Break clauses – A recession usually sees an increase in the numbers of tenants seeking to break leases in an attempt to escape liability for rent. Break clauses in leases are usually individually negotiated and drafted so tenants wishing to exercise the break need to be very careful to ensure they have done so validly. This is an area of law where technicalities matter.
5. Assignment or underletting – Where there is no break clause, but the tenant nonetheless wants to find a way out of its lease obligations, it may seek to find a new occupier and either assign the lease or grant an underlease. In both cases, the landlord’s consent will usually be required, but cannot be unreasonably withheld. It is very important for both landlord and tenant that the prospective assignee or undertenant is sufficiently financially robust to pay the rent and meet the other covenants under the lease.
6. Business lease renewals – the trend in the last 20 years has been for business leases to be granted for ever shorter fixed terms: 3 – 5 years, or longer only with break clauses, is now the norm, even for some larger premises. One of the effects of this is that the mechanism for renewal of business lease renewals under the Landlord and Tenant Act 1954 is triggered more frequently. In a falling market, where premises are over-rentalised, tenants will usually push the lease renewal process. However, even this well-established statute can hold surprising traps, and the 1954 Act is not as tenant-friendly as is sometimes assumed.
7. Mortgage repossessions / receivership – If mortgage payments are not kept up, a lender may seek repossession of the charged premises or appoint a receiver. Even if a tenant of mortgaged premises is paying his or her rent, if the landlord has fallen behind with its own mortgage payments, it may still face eviction if the loan was not granted subject to the tenancy. Where receivers have been appointed over tenanted property it is important the tenant engages with them when requested.
8. Breach of contract disputes – The 2008 recession saw a large number of breach of contract claims where buy-to-let investors had contracted to buy properties off-plan. When these were ready and completion was triggered, the investments were less attractive and buyers found themselves in many case unwilling or unable to complete. While off-plan sales are not at 2008 levels, breach of contract claims will be a feature of any recession.
9. Professional negligence – The consequences of bad professional advice are likely to be more serious in times of recession. Opportunities that in a more buoyant property market may have cancelled out the negligent advice may simply not be available to get the professional out of difficulties.
10. Taking advice – When every pound is precious, it can be tempting to try and save money on professional fees. However, it is outside most people’s capability to take on a complex commercial lease negotiation, serve contractual or statutory notices or represent themselves in court proceedings and the reality is that a DIY approach is likely to result in a worse outcome at the end of the day.
We will be continuing to share updates as the situation around COVID-19 evolves. You can find the contingency plans that we have put in place, along with further advice, here.