What now for commercial sector tenants? – Gareth Hale

The past three months have seen unprecedented legislative intervention by both the UK and Scottish governments in the relationship between commercial landlords and tenants.

Gareth Hale is a Litigation Partner, Dentons

The changes introduced by emergency legislation are temporary – most measures implemented will cease to apply after 30 September (unless extended for a further fixed period). However, the impact of the pandemic will be significant and lasting for many in the commercial property sector.

The legal obligation on tenants to pay rent continues, regardless of both the pandemic and the fact that many tenants have been unable to trade for significant periods. There has been no governmental underwriting of rent of “furloughed space”. Thus far, business interruption insurance policies have not proven to be a useful avenue for landlords or tenants.

The substantive steps taken by government have focused on avoiding tenant evictions and insolvencies during the pandemic. In Scotland, the Coronavirus (Scotland) Act 2020 has extended the minimum warning period for commercial lease termination from 14 days to 14 weeks; and the Corporate Insolvency and Governance Act 2020 makes it almost impossible for a landlord to apply to wind up a tenant (until 1 October at the earliest). This means two of the most effective debt recovery tools normally at a landlord’s disposal – threatening to terminate a lease or threatening to wind up – are currently unavailable. However, unlike in England and Wales, the Scottish Government has not legislated to curtail the other tools available to landlords to recover rent and other sums.

In Scotland we have not seen much enforcement action against tenants in the past three months. In many cases, this is because landlords have agreed to grant rent concessions to tenants. In others, it is simply because the courts and sheriff officers, who enforce payment, have not been operating in the usual way. However, the position is changing and Scottish landlords now have a suite of tools at their disposal. As we head towards the re-opening of most commercial premises in Scotland, pressure on tenants is mounting. This is despite government support by way of business loans, VAT deferral, rates relief and the employee furlough scheme. Some in the industry are calling for more direct financial support from government.

Inevitably, the initial focus was on protecting tenants. However, there is a wider ecosystem to consider – a network of landlords, tenants and their respective lenders. Parts of that ecosystem (high street retail, in particular) were in danger even before the pandemic. History tells us economic crises tend to accelerate existing long-term trends. Commercial property was already an industry that needed to change, and fast.

The latest intervention from the UK government is the Code of Practice for commercial property relationships during the Covid-19 pandemic, published on 19 June and endorsed by the Scottish Government in an open letter published on 2 July. It recognises the complexity of the problem and aims to provide a framework by which landlords and tenants might come together to create a “shared recovery plan”. The sentiment is admirable and, in the way in which it exhorts compromise, transparency and mediation at the expense of legal rights, it is a somewhat remarkable document.

Whilst the code is voluntary, it has received broad support from a range of industry bodies and complementary guidance from UK Finance on behalf of lenders. It provides a reference point as to what constitutes fair play and suggests possible compromises that parties might want to consider. These range from simply deferring rent for a period, to substantially re-writing a lease. It recognises this is a time for pragmatic and creative solutions and blunt remedies available via court action might be better put to one side in favour of trying to mediate a solution which gives both parties hope for the future of their business relationship.

Unfortunately, there are two fundamental difficulties: first, the code has no teeth; and, secondly, time is already running out for many landlords and tenants. This will mean that CVAs and administration are inevitable for some. However, there will be an important role for lawyers and mediators to play in assisting others to avoid the same fate.

Gareth Hale is a litigation partner, Dentons