Coronavirus: A warning to Commercial Tenants

If you are a tenant of business premises, you should be aware that a minority of commercial landlords are taking advantage of the financial pressure on businesses caused by the Coronavirus.  Rather than agreeing to an unconditional, alternative arrangement for the payment of rent such as a rent-free period or rent deferment, they are requiring the tenant to give up its statutory protection in return

One such recent example involved a commercial tenant seeking to agree a 3 month rent-free period, which the landlord would agree to but on condition that the tenant surrendered its protected lease and would be re-granted a non-protected lease, subject to a new 3 month break clause, exercisable by either party on 1 month’s notice.  Whilst on the face of it this appeared attractive to the commercial tenant, having regard to the rent saving, the loss of statutory protection, (even ignoring the introduction of the new break clause) was felt to be unreasonable and taking advantage of the tenant’s financial difficulties

By way of a reminder, the Landlord and Tenant Act 1954 (“the 1954 Act”) governs the relationship between the vast majority of landlords and tenants of business premises, (there are exceptions); the rights and obligations afforded by the 1954 Act supplement those set out in the terms and conditions of any lease

The 1954 Act provides the following protection – subject to the landlord proving a statutory ground for possession, the tenant has a right to a new lease of the business premises following the expiry of the term of the current lease.  Notwithstanding the expiry of the term of the current lease, a landlord can only seek to terminate a 1954 Act protected lease by the service of a statutory notice providing a termination date not less than 6 months nor more than 12 months from the statutory notice served

Following the service of the statutory notice, a landlord can only resist the grant of a new business tenancy, if it can prove a statutory ground for possession; the most common examples of which are: a landlord’s intention to demolish, reconstruct or carry out substantial works of construction to the premises, or its desire to occupy the premises, for their own business purposes. If matters cannot be agreed with the tenant, then it is necessary for a landlord to satisfy the Court that it has a genuine intention to do so, i.e. to carry out works, or to occupy the premises itself

A landlord has to pay statutory compensation to a tenant of business premises, which is a multiplier of the rateable value, on it obtaining possession of the premises based on a statutory ground

If a landlord does not oppose the grant of a new business tenancy to the tenant, then this affords the landlord in opportunity to be paid the current market rent for the premises under the terms and conditions of the new lease, which would be desirable in a rising market

Contracting out of the Act 1954

Unlike with residential property, commercial landlords and tenants can, however agree to “contract out” of the statutory protection, so that the tenant will not have the benefit of the right to a new lease.  This provides a landlord with flexibility when the lease comes to an end. For their part, tenants are often quite content for a lease to be contracted out, particularly given the current trend of shorter leases, which many believe will be even more popular given the effects of Coronavirus

The procedure to contract out is set out in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (RRO), which amended the 1954 Act and involves the landlord serving a warning notice on the tenant, in required form and in return, the tenant providing the landlord with a declaration, (a statutory declaration, if the landlord’s warning notice is served less than 14 days in advance the lease, or agreement will be entered into) to the effect that that it has read and understood the warning notice and accepts the consequences.  Finally, the agreement between the landlord and tenant to contract out must take place before the lease, or agreement is signed and  be contained in, or endorsed on the lease, or agreement for lease

It must also be noted that should there be any guarantor(s) to the lease, the notice and declaration process needs to be replicated for the guarantor(s), in addition to the tenant.

If you have any queries, please contact Anthony Best, Head of Dispute Resolution