The government created legislation and guidance for businesses during the pandemic, attempting to protect the economy. It is now consulting on the best way to withdraw or replace the restrictions on evictions and arrears recovery.
As for the £6bn black hole of unpaid rent, stalled lease renewal negotiations and rent reviews that arose since the pandemic, parties were provided with a code of practice and asked to reach ‘mutually beneficial’ and ‘affordable’ rental agreements to deal with the ‘income shocks caused by the pandemic’. These agreements can take a number of forms.
Pandemic clauses, which reduce or halt rent payments when businesses are forced to close, are becoming the norm. In the recent case of WHSmith v Commerz Real, the court ruled that the trigger was the closure of non-essential retailers, even though the tenant was an essential retailer. The outcome may have been different if the tenant had been located on a high street rather than the “empty and echoing” Westfield Centre.
Side letters documenting rent reductions and concessions have also gained popularity. The discounted transactions pose a potential problem for reviews and renewals falling after March 2020.
There has also been a shift to monthly rent payments and an increased prevalence of turnover or ‘hybrid’ rents. While this assists tenants with fluctuating cashflows, they require increased administration and financial transparency.
Finally, the easing of restrictions on subletting part. Most commercial leases only permit sharing occupation among group companies. Tenants are seeking a relaxation of these restrictions as a way to address changes in need.
Whether these measures will mark a sea change in landlord and tenant relationships is yet to be seen. However, if the court in WHSmith is correct that the ‘prospects for the summer of 2021, and the future thereafter, are likely to improve’, many of the pandemic-related discounts and terms may well be short-lived.
Kate Poole is partner and Kanchan Adik is senior associate, real estate litigation at Eversheds Sutherland