With a very uncertain future, many businesses will be concerned about their fixed overheads for the coming months. We have shared ACAS' guidance for salaries (see For Employers), but we have also been asked about whether tenants should consider abandoning leases/tenancies, or renegotiating their terms.
The short version is - be careful! While the logic of ‘the landlord won’t want to find a new tenant' is strong, the reality is that, in general, leases very much favour the landlord's position. Any ‘high-jinks’ on the part of the tenant can often give rise to (a) an option for the landlord to end the lease (often called ‘re-entering’); and/or (b) an option for the landlord to recover all of the costs of pursuing a non-paying tenant, together with interest, under an indemnity.
The Starting Point
Every lease / tenancy is different. It will be the terms of your specific lease which are most important in considering your strategy.
Understanding ‘Forfeiture’ / ‘Re-Entry’
Generally speaking, a landlord can re-enter (or take back) a property for the non-payment of rent.
If the landlord takes the property back, remember that from that moment, you don't have to pay any further rent. For this reason, in uncertain economic climates, or during downturns, landlords will very much see this as a last resort. As soon as you are gone, they will need to find another tenant.
If the letting market is poor and the landlord cannot find a new tenant straightaway, the landlord could be liable for outgoings in respect of the void property, such as rates, the cost of insuring the property etc.
Threatening not to Pay
If you were to threaten not to pay, this could trigger a forfeiture clause (depending on the wording of your lease), which could see you starting a cascade of consequences you don't presently desire.
Similarly, if your lease contains Guarantor provisions (could be a parent company, a director or a personal guarantee from a shareholder), the company refusing to pay will almost certainly trigger the Guarantee provisions. Again, this might not be your intention!
The landlord may look to Guarantors.
The landlord may hold a rent deposit, which it can start to eat into while you are in arrears.
The landlord may look to invoke the Commercial Rent Arrears Recovery (CRAR) procedure (below).
The landlord could serve a Statutory Demand for the unpaid rent (and publish any default of payment in the Gazette, with a view to taking steps to wind up the lessee company).
Finally, the landlord could also go to court. This is likely to be a slow and expensive option - a well-advised landlord would start higher up this list.
Commercial Rent Arrears Recovery (CRAR)
CRAR allows a landlord to instruct an enforcement agent to take control of a tenant's goods and sell them in order to recover an equivalent value to the rent arrears. CRAR requires various notices to be served on the tenant by the enforcement agent at each stage of the process. The form of notices are not prescribed, however, certain information must be included. If the enforcement agent offers to produce the notices, the landlord should satisfy itself that the notices are correct.
Rent does not include any sum in respect of rates, council tax, services, repairs, maintenance, insurance or other ancilliary matters even if these amounts are reserved as ‘rent’ in the lease (section 76(2), TCEA 2007).
Notice must be given at least seven clear days before CRAR is exercised. Clear days excludes Sundays, bank holidays, Good Friday and Christmas Day.
Being Commercial About the Whole Thing
It is clear that the tenant doesn't hold many cards in such a situation, particularly from a legal perspective. That is not to say that there is nothing that you can do as a tenant.
For those reasons set out above (finding a new tenant, paying for insurance, rates, utilities, security etc), landlords prefer to have a tenant on the hook, even if only to avoid those outgoings.
If you have, hitherto, been a good tenant, it is possible that you may be able to negotiate some wiggle room from your landlord.
What might this look like?
- A ‘rent holiday’ - asking your landlord if he would consider a rent holiday (with any time taken ‘rent free' added to the end of the lease.
- A ‘rent reduction’ - asking if your landlord would consider a commercial renegotiation of the rent amount - it would probably shorten this discussion if you are able to table a sensible compromise position, remembering that the landlord's worst case is not ‘no rent income’, it's all the costs of the building.
- Payment terms - asking if the payment terms of the rent could be amended, or if you could enter into a payment plan (using the lease's rate of interest) - eg, discharging half the rent as you go, and the remainder at some point in the future.
- A ‘space reduction’ - if you think that you may not need all your space, perhaps consider asking whether the landlord would agree to you ‘giving some back’ either temporarily or in the longer term.
- Sub-Letting - if you think there might be a possibility that you could get help from someone else, perhaps by sharing the space or consolidating your operations with people you know, some leases will allow you to do this without permission, where others require the landlord not unreasonably to withhold consent - this might be another way of sharing the burden.
Remember that most landlords are protected by gatekeeping agents. Those agents act in the landlords' best interests (yet may not take a longer-term view when analysing this), so will automatically be averse to conceding rent holidays/reductions etc.
Try to get hold of someone sensible. Explain that there is presently no need to worry, but that if the business is to weather the current climate, adjustments need to be considered sooner rather than later. Mindful that these things don't happen overnight, a long lead-in with a willingness to find a mutually-acceptable solution is strongly counselled!