The ongoing COVID-19 pandemic has resulted in an uncertain economic outlook for the UK, which is likely to be felt by commercial landlords and tenants for some time.

One likely effect of the lockdown is the ability of commercial tenants to meet the obligations imposed on them under their leases.

Here, commercial property solicitor Jake Neary explores some of the issues facing landlords and tenants, and how such issues should be dealt with.

Rent reductions

The lockdown has resulted in a decrease in revenue for many tenants throughout the UK, particularly in the retail and hospitality sectors, which has led to some tenants struggling to pay their rent. Consequently, tenants may be approaching landlords to request a suspension or a reduction of the rent due.

Both landlords and tenants will want certainty over the arrangements, including whether the rent is to be permanently decreased throughout the lease term, if the arrangement is personal to the current landlord and tenant, and whether any rent that has been suspended will eventually need to be paid.

To provide this certainty and to help in avoiding future disputes, landlords and tenants should record the agreement formally. This may include a deed of variation, where the changes to the lease are to be permanent, or a side letter for an agreement which is temporary or personal to the current parties.

When drafted correctly, these documents can be used to vary the terms of a lease where needed, while ensuring that provisions unaffected by the changes remain in force.

Property renovations

With many firms currently closed for business, tenants may see an opportunity to make improvements to their commercial space. In most instances, under the terms of a commercial lease, tenants must obtain a landlord’s consent to carry out both minor non-structural works and major structural works to a property.

If a landlord is approached by a tenant and agrees to the works, this consent should be formally documented in a licence for alterations. This document will state the agreed terms of the proposed works, dealing with the timescales for carrying out such works, the standards to which the works must be carried out, and how these alterations will be removed at the end of the lease term.

The landlord’s costs for providing consent are usually payable by the tenant under the terms of the lease.

Risks in varying leases

Any variation to the terms of a lease should be approached with caution. Where the more fundamental terms of a lease are varied, the effect may be a what is known as a deemed surrender and re-grant.

This means that while not the intention of the parties, the existing lease is deemed to have been brought to an end and a new lease granted. This can result in a number of unintended consequences for both the landlord and tenant, including a potential liability to pay Stamp Duty Land Tax for the tenant and an impact on the ability of the landlord to enforce leasehold covenants against the tenant. Any guarantors to the lease may also be released from their liability.

In addition, a surrender and re-grant may afford the tenant a “protected lease” under the Landlord and Tenant Act 1954, potentially providing the tenant with a statutory right to renew its lease at the end of the lease term.

Accordingly, it is critical that both parties are properly advised on the implications of any such arrangements. WHN’s specialist team is able to advise on the different options available to landlord and tenants, ensuring that the documentation properly reflects the intentions of the parties without unintended consequences.

For further advice on acquiring deeds of variation, licence for alterations, or any other commercial lease matters, call Jake Neary on 01254 272647 or email him at  jake.neary@whnsolicitors.co.uk