Coronavirus and charities' real estate

15 May 2020 In-depth

Amanda Gray and Mark Traynor assess the implications of the lockdown for landlords and tenants.

We’ve all heard plenty about the challenges facing the charity sector as a result of the Covid-19 pandemic, and about the various government financial assistance packages available to help weather the storm. But the impact of the crisis is also being felt by charities in another, often overlooked, way: their real estate arrangements.

Now that the initial shock of lockdown has receded slightly, charities should reflect on how they can position themselves so that they can meet the demands of the next few months. In this article, we highlight some of what’s happened in recent weeks and what it means for charities’ property arrangements.

Rents

The March rent quarter date saw landlords suffering rental shortfall due to tenants either not paying or seeking rent concessions.

Various big-name landlords have agreed to a variety of temporary rent reliefs – rent holidays, deferrals, reduced payments for specified periods, monthly rather than quarterly payments or some combination of the above – in order to assist their tenants. This helps the landlords avoid having insolvent tenants, empty properties or responsibility for business rates.

However, not all landlords have and, unless there is some wording in the individual lease which allows for a rent reduction in specified circumstances, landlords don’t have to offer rent relief.

The Coronavirus Act 2020

The Coronavirus Act seeks to provide tenant security. So what key aspects of it should you be aware of? In our view you need to bear in mind the following:

  • It puts in place a moratorium on re-entry and forfeiture for non-payment of rent until 30 June. This does not mean that rent is not payable between 26 March and 30 June, but simply that landlords cannot forfeit leases during that period. Rent for this purpose includes all sums payable under the lease, so service charges and contributions to the landlord’s insurance premiums are still payable.
  • The moratorium only applies to non-payment of rent. Tenants are not protected for other breaches of covenant.
  • Any interest due on late payments will still accrue and the debt will increase if tenants do not pay the rents on time.
  • Unless landlords expressly waive the non-payment of rent as a breach during this period, they could reserve the right to forfeit the lease for the non-payment of rent after 30 June.
  • There is no limitation in the Act on a landlord’s ability to use the Commercial Rent Arrears Recovery protocol. This process requires landlords to follow a protocol before instructing a bailiff to recover goods for the non-payment of rent. However, given that a lot of tenants are not in occupation at the moment, it is unlikely landlords would go down this route.
  • The landlords’ contractual right in leases to recover their costs of enforcing for any breach of tenant covenants is not limited. If the rent isn’t paid or if there are other breaches that occur during this period, the landlord could still recover their costs of enforcement.
  • Landlords can still issue proceedings for possession, however, no order for possession can take effect prior to 30 June.

Closure of buildings and properties

In most leases, landlords will have covenanted to provide quiet enjoyment, ie letting the properties to their tenants without any unlawful interruption. If landlords shut down buildings they would be exposing themselves to claims for breach of such covenant.

What happens, however, if the government legislates that all commercial buildings are to be closed? In that case, a landlord preventing a tenant from using the building would not be an unlawful interruption and not a breach of covenant.

Tenants should also be aware of what their leases and insurance policies say about leaving their properties vacant. Some leases include obligations on tenants to ensure properties are not left vacant for a period of time. Insurance policies will also have a maximum amount of time whereby properties can be left vacant.

Business rates relief

The government introduced business rates relief for all retail, leisure, hospitality and nursery businesses in England. This is a 100% rates holiday applicable for the 2020/21 tax year. There is no rateable limit on the relief, and occupied properties in these sectors that will have had to close as a result of the current restrictions will be eligible.

To qualify for relief, the property should be wholly or mainly used for the above qualifying purposes. This is similar to other forms of relief where the test is on use rather than occupation.

The relief is welcome news for the retail, leisure and hospitality industries, including charities with shops. At present, other struggling business sectors such as offices, storage and manufacturing will continue to pay full rates. It is yet to be confirmed if other sectors will get relief.

Insurance

Will insurance policies cover coronavirus disruption?

There was confusion until the government added Covid-19 to its list of “notifiable diseases”. This is a formal classification which is required by many insurance policies. It means that any business interruption or denial of access to property or losses caused by the coronavirus outbreak may be covered.

Every policy is different and you should check the terms of the insurance policy to find out what is covered. There are two fundamental questions:

  • Is Covid-19 covered? Standard commercial insurance policies usually cover a wide range of risks. But they are unlikely to cover specialised or unlikely risks, such as coronavirus. Newer or recent policies may exclude coronavirus as a “pre-existing circumstance”;
  • Is Covid-19 excluded? The exclusion list will need to be checked. We know of policies where Covid-19 is excluded because it falls under a “mutant variation of atypical pneumonia or SARS”.

Preliminary indications are that losses caused by Covid-19 are not generally covered by insurance. However, if insured parties begin to successfully challenge insurers’ decisions in this area, the position might change.

Practical landlord and tenant issues

Lease ending or starting

One of the main issues for tenants whose leases are coming to an end is how to access their property. Many need to organise the logistics of moving out and handing over the property in the state and condition required by the lease. Landlords may be willing to extend leases for a short period in the circumstances. If this coincides with tenants moving into new property, having conversations with both the current and new landlords may evolve into a practical solution for all parties. For example, temporary rent reductions for both the current and new leases would mean that the current landlord would not have to find a new tenant and be liable for rates, the tenant would not be in breach of its current lease and would have a new property to go to, and the new landlord would have a tenant ready to move in when the time is right.

Alterations

Landlords and tenants undertaking fit-out works will need to consider the following:

  • Whether contractors are able to continue the works;
  • The ability of contractors to access the properties;
  • The applicability and effect of any force majeure clauses;
  • Whether there is scope to amend building contracts to postpone the works.

Opening up conversations with the fit-out team and tenants/landlords at an early stage will deliver a greater chance that issues such as these are raised and dealt with amicably.

Lease negotiations

Both landlords and tenants may wish to consider adding clauses into their contracts to cater for any delays to completion. For example, parties may want to include some sort of notification and postponement process to keep the contract “alive”, if completion cannot happen by a set date as a consequence of Covid-19.

Break rights

Some tenants will have exercised their break rights with the break dates falling during the lockdown period.

The common pre-conditions to a break are that the tenant must pay the rent up until, and provide vacant possession by, the break date.

These conditions must be met, as even the most minor of breaches will result in the break being invalid and the tenant locked in for the remainder of the contractual term or to the next break date. In order to provide vacant possession, tenants would need to remove all their furniture, fixtures and fittings and hand the property back empty. The current government restrictions would make this a tall order.

There are ways around this, but they require the landlords and tenants to enter into an early dialogue. The parties could agree a surrender of the lease for a later date, or they could agree to vary the break provisions, waive any pre-conditions or vary the break date. There is no requirement on landlords to act reasonably in regards to a surrender or a variation, but one would hope in these circumstances that the parties can work together in order to reach a common goal.

Conclusion

Everyone is concerned about their own survival. But the key to a successful resolution of issues in this area relies on constant communication between all parties.

Mark Traynor is a partner and Amanda Gray a senior associate at Bates Wells  

Governance & Leadership is a bi-monthly publication which helps charity leaders and trustees on their journey from good practice to best practice. Written by leading sector experts each issue is packed with news, in-depth analysis and real-life case studies of best practice in charitable endeavour and charity governance plus advice and guidance straight from the regulator. Find more information here and subscribe today!

 

 

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