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Markel Insurance

15 Jul 2020

COVID-19: The latest lease guidance and information for landlords and tenants

For most of the year, we have undoubtedly seen sweeping and unprecedented changes to society as a whole due to the COVID-19 pandemic. Landlords have been far from immune to this uncertainty with tenants’ ability to pay under threat, along with a lack of ways they can take action if rent is not settled.
Now we are emerging from lockdown, a new set of uncertainties have, understandably, come to the surface for many landlords. Karen Parry, a solicitor at Markel Law, has laid out the recent developments that concern landlords and tenants, along with general advice to consider before taking a lease.

Recent developments affecting landlords and tenants

1. Code of Practice

A new Code and Practice for commercial property relationships was published during the COVID-19 pandemic on 19 June 2020. It applies to the commercial sector and is voluntary – the code aims to promote good landlord and tenant relationships during the COVID-19 crisis. It applies until 24 June 2021. Although it doesn’t change the legal relationship between the parties, it’s supported by some leading landlord and tenant organisations, including the British Chambers of Commerce, the British Retail Consortium and the Royal Institution for Chartered Surveyors.

The intention is to promote cooperation between the parties. Tenants who can pay should do so, while those who are unable to pay should seek agreement with their landlord to pay what they can, taking into account the Code. Landlords, who may have financial difficulties themselves, should provide support for tenants as far as possible. It may be that a temporary agreement can be reached that is satisfactory for both parties – the Code provides a number of options for how to agree new rental arrangements. Essentially, landlords should be willing to consider a tenant’s reasonable suggestions.

2. Extended period for temporary restrictions 

On 19 June, the government announced that it will extend the period for temporary restrictions on landlords’ remedies for tenants who have defaulted under the terms of their lease. Remedies generally available to landlords are forfeiture of the lease, the use of CRAR (Commercial Rent Arrears Recovery – a statutory procedure which allows commercial landlords to recover rent arrears by taking control of the tenant’s goods and selling them) and winding up petitions against the tenant.

The moratorium on the forfeiture of leases has been extended to 30 September 2020 with a similar time extension before landlords are able to serve winding-up petitions. Also, CRAR cannot be used unless the equivalent of 189 days’ unpaid rent is outstanding during the period to 30 September 2020, meaning the use of CRAR will not be available unless there is more than two quarters’ rent outstanding. These do have an (albeit temporary) effect of weakening the landlord’s position and it remains to be seen what happens when this further extended period comes to an end.

It is important to note that with the above that none of the measures removes or reduces the obligation to pay amounts due under the lease but they only defer the obligation of the tenant to pay or the ability of the landlord to enforce payment against the tenant.

General advice to consider when taking a lease

It is sensible for a commercial tenant, when a new lease is being considered, to take legal advice along with the advice of a good surveyor. Tenants often enter into leases on the assumption that they are temporarily renting a property that they will hand back to the landlord after a period of time and with no thought to the very onerous responsibilities they have for the property. It can come as a shock that they may end up with as much responsibility for the property as if they had purchased it.

Proposed tenants should arrange for a property survey to be carried out (or if they are taking part of a building they should be advised to have a survey of the building). A survey should identify any physical defects in the property for which the tenant may find itself responsible. It is important to be aware of physical defects before the lease is entered into – a surveyor may find, for example, that the roof is in a poor state of repair. Once the lease is completed it will be too late to approach the landlord with a complaint about the roof or how much it is going to cost to repair if the tenant is now responsible for it (or part of it via the service charge).  

Some important matters to consider are:

1. The extent of the property

Is the tenant being offered a lease of the whole property (in which case it will usually be responsible for the repair and maintenance of the whole property) or is the tenant taking a lease of part of a building? In both cases, the tenant should consider whether the lease is ‘FRI’ (full repair and insuring). If this is the case, with a lease of a whole property the tenant will usually be responsible for the repair and maintenance of the whole building and payment of the entire insurance invoice for the property.

Whereas, with a lease of part of a building, the tenant will usually be responsible for the repair and maintenance of the interior of the property demised to it but will contribute by way of service charge towards the costs of repair and maintenance of the building and other items common to all tenants together with payment of a proportion of the insurance invoice for the building.

2. Service charge

What does this cover? How extensive is it? Taking the example above, can the cost of a new roof be excluded and limited to the cost of only basic repairs? Service charges are a major cause of dispute between landlords and tenants. It is important to know what will be included and how it will be calculated. Some landlords will agree a ‘service charge cap’ where the service charge is literally capped at a certain level, usually with the cap increasing each year, but the tenant will not pay above the capped level. It can be disadvantageous for the landlord as it leaves him constrained and potentially out of pocket if he is unable to pass costs on to the tenant.

3. Repair clause

The tenant should have a surveyor assess the state of repair of the property or take photographs to ensure that the tenant is not signing up for more onerous repairing obligations than it needs to. Most leases will require the tenant to keep the property “in good and substantial repair and condition” but if the property was not in that state when the lease was taken, there could be an argument at the end of the lease when the tenant tries to return the property in the condition it was in when the tenant took it.

To avoid this, the tenant (or preferably it’s surveyor) should prepare a Schedule of Condition which is a photographic and descriptive document to be attached to the lease which shows the state and condition of the property at the time the lease was granted and the tenant should be obliged in the lease to hand the property back in no worse state and condition than that shown in the schedule. This can avoid arguments at the end of the lease and costly disputes as to dilapidations claims.

4. Planning use

The lease may specify that the property can be used for a certain purpose but it is very important to check with the local planning authority that this is also the authorised use under planning law. This is the responsibility of the tenant. It would be a disaster to take a lease only to find that it cannot be used for the use it was intended.

5. Stamp Duty Land Tax (SDLT)

It is important to know, before the tenant enters into the lease, whether SDLT is payable and if so, how much, as this can be an additional expense that has not been considered.

For further information and guidance on lease-related issues, contact Karen Parry or call us on 0371 705 4006.

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