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Commercial rent arrears: how landlords and tenants can work together

Author: ICAEW Insights

Published: 17 May 2021

Rules introduced during the pandemic to protect businesses from being evicted by their landlords due to rent arrears are a headache for commercial property owners but there are other remedies at their disposal, a commercial property litigation expert says.

Shams Rahman, a partner in the property & trusts litigation team at law firm Edwin Coe LLP, will tell ICAEW members at a webinar next week that difficult conversations around rent arrears are becoming more common the longer the pandemic goes on. 

While there was huge sympathy for companies who had struggled during the last year, particularly small companies who had racked up huge debt in rent holidays and retail businesses forced to close and furlough staff, Rahman says in some cases, tenants were abusing temporary rules protecting them from eviction. There was also a misconception among commercial property landlords that their hands were tied when it came to evicting commercial tenants who had fallen behind on their financial obligations, Rahman adds.

A moratorium on enforcement action against tenants for rent arrears has been extended under the Coronavirus Act until the end of June as part of the Government’s efforts to protect businesses struggling during the pandemic. Similarly, a moratorium on evicting insolvent tenants means that unless landlords can show that the coronavirus wouldn’t have made a difference to the tenant’s solvency, they cannot proceed with a winding up of the tenant. 

“Commercial landlords with property portfolios have their own financing arrangements and liabilities and yet they have found lots of tenants have point blank refused to pay. It seems unfair that landlords are losing out because they are businesses too,” Rahman says. Just this week landlords of New Look stores lost their legal battle against the fashion chain’s CVA, which moved its stores onto turnover-based rents after it was given the green light by a majority of creditors. Several disgruntled landlords launched a legal challenge in response. 

Although it wasn’t currently possible for landlords to take action against tenants based on rent arrears, landlords could instead focus on areas such as dilapidations, subletting without consent and other potential breaches of the terms of tenancy agreements that give landlords the right to forfeit the lease, Rahman adds. “If tenants have undertaken work without consent there may be a guarantor who may be on the hook, and there may be rent deposits. If you look at the news it’s all doom and gloom for landlords and you can’t do anything but the fact is, there are other remedies available. 

Against a backdrop of fundamental change across the commercial property market including predictions of widespread downsizing as companies adopt hybrid working models and the further demise of the high street as retailers shift increasingly online or close altogether, it’s clear that businesses of all shapes and sizes are reassessing their commercial property needs. 

As a result, we’re seeing a trend away from quarterly rents and instead requests by tenants for monthly rent combined with some link with turnover rent. “Depending on the market and location, that will either be grabbed by landlords or resisted very strongly,” Rahman says. “Tenants will need to carefully assess their business needs; if the workforce is only in the office for three days, do they need all that space?”

Rahman urged tenants to take advice on exercising any break clauses in their lease agreements. “Break clauses often have strict conditions attached to them. If tenants don’t fulfil the conditions, contractually they could be on the hook for the contractual rent for the next decade. 

Despite all the doom and gloom of the last year, commercial property rates continue to hold their own, Rahman says, and major companies are continuing to invest in new HQs in central London.

More information: 

Shams Rahman will offering practical guidance to both commercial landlords and tenants on rent arrears recovery, lease negotiation strategies and restructuring rental payments in a webinar taking place next week 

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