The most common question we are being asked by clients right now is ‘How can I best conserve my cash?
The answer will vary from one business to another. To help you assess the best strategy in your case, here is a summary of the current situation in terms of statutory protection, contractual obligations and potential negotiation strategies.
Statutory and Legal Context
As I explained in Part 1, you have the option not to pay any rent up until 30 June 2020. This is because the Coronavirus Act 2020 prevents your landlord from forfeiting your lease for non-payment of “rent” between 25 March 2020 to 30 June 2020.
The term “rent” in this context is defined as ‘any sum a tenant is liable to pay under a relevant business tenancy’. It therefore includes service charges and building insurance.
Please bear in mind that the money due will not be written off and at some stage you will need to agree a re-payment plan with your landlord. The Act does not remove your contractual obligations in other words.
In practice, the re-payment plan is likely to form part of a lease renewal, break option surrender or rent review negotiation, depending on where you are in the term of your lease and what provisions exist for rent reviews and so on.
What are my options?
Before considering your options, you should ask yourself these two key questions:
i. Can I predict what our space requirements are going to be once we emerge from the crisis? and
ii. Can I predict how long we are likely to have those space requirements for?
If you are unable to answer either of these questions with any degree of certainty, your priority should be to maintain maximum flexibility in your leasing arrangements and as good a relationship as possible with your landlord. We will call this Scenario A. On the other hand, if you are confident that you can answer both these questions, you are likely to be in a far stronger negotiating position and should consider acting sooner rather than later. We will call this Scenario B.
Here are some options for you to consider depending on whether you are in either Scenario A or Scenario B.
Scenario A – you are uncertain about your future space requirements
Suspend all rent payments unilaterally until 30 June 2020 and possibly longer, if the Government extends the ‘Relevant Period’ under the provisions of the Coronavirus Act 2020. Remember, you will have to agree a re-payment plan with your landlord once the crisis is over.
Ask your landlord in advance whether you can suspend rent payments or at least significantly reduce them for a set period. This option might well prove better in preserving your relationship with the landlord than Option 1.
Same as Option 2. but ask for the financial concession to be set off against any rent and/or security deposits that you paid when you first entered the lease.
Same as Option 3. but agree to re-pay any deferred amounts over a set period and from a clearly defined start date.
If you are currently paying your rent on a quarterly in advance basis, you could request that the payment terms are changed to either monthly in advance or ideally, monthly in arrears.
If the landlord is unwilling to discuss any of the above concessions, you should investigate the alienation rights within your lease to see if it would be possible to sub-let surplus space in the short term. For example, you may find that a neighbouring tenant needs more space as soon as the “lockdown” has been lifted. If your lease allows you to sublet part of your demise, it could help mitigate some of your overheads and help preserve some cash until you are able to better determine your longer term space requirements.
Check that the landlord has kept your building open. If not and your lease contains ‘quiet enjoyment’ rights, then you may have a claim against the landlord as the Government has not yet, demanded that office buildings be shut altogether. This could create some leverage in negotiations over the concessions described above.
Scenario B – you are confident that you know what your space requirements will be
If you are certain that you wish to remain in your current building and have a break option within the next 12-18 months, you could offer to surrender your break option in exchange for a rent free concession as well as other “wants” you may have. These could include pre-agreeing a nil increase in the rent at the next rent review. Before entering such a negotiation, we recommend you take professional advice to ensure that all relevant issues are addressed during the negotiation phase and that the agreement is satisfactorily documented.
Similarly, if you have a lease expiry within the next 12 months and are happy to stay put, you could agree an early lease renewal in exchange for a rent free period or rental discount which will commence on completion of the reversionary new lease.
If you are confident that you need either less or more space, but want to remain in the same building, you could alert your landlord to the fact so that any appropriate space that becomes available is offered to you first. Most landlords that own multi-let office buildings will be keen to minimise voids resulting from Covid-19 and will do their best to accommodate those wishing to either reduce or increase their space. If a suitable opportunity arises, you can then negotiate a new lease together with any dilapidations and re-instatement liabilities you may have.
If relocation is an option for you, then you are in a potentially strong position. Most landlords have suffered a dramatic reduction in enquiry levels and are expecting an economic downturn over the next 12 months. Providing you have a reasonably strong financial covenant, the terms being offered are likely to become increasingly attractive as the market weakens from a landlord’s perspective.
Conclusions – so far! ( Friday 27th March)
Regardless of your circumstances, we recommend that you maintain dialogue with your landlord as well as your neighbouring tenants. Circumstances could change quite rapidly. You may find that opportunities arise which will aid your business in unexpected ways. For example, your landlord may decide to bring forward redevelopment plans for the building and offer tenants early lease surrenders. Alternatively, a neighbouring tenant of yours may wish to assign their lease in the next few weeks. If you happen to need more space, this might prove to be an attractive option particularly, if it is already fitted out.
One key recommendation we have is that whatever agreement is struck with your landlord even if it is a temporary reduction in the rent, you have it professionally documented. In most cases, side letters will probably be used and attached to existing leases. However, the terms of these side letters should be carefully considered by both parties.
Of course, the market could look very different on the “other side” of this crisis so there is a strong case for sitting tight and waiting for the dust to settle before making any decisions. Unfortunately for some tenants particularly those with break notice deadlines looming, decisions must be made. Challenging times indeed!
If you have any questions or need advice in relation to a specific lease or building, let us know by contacting Martyn Markland by email at mm@tenantag.co.uk.