Article prepared by Alasdair MacLure, partner, Ledingham Chalmers.
If you own a business operating out of premises, or you’re a commercial landlord, the COVID-19 pandemic means you’ll understandably be concerned about cashflow and costs, as well as the rights and obligations contained in your lease.
Either way, it pays to know the latest when it comes to legislation and guidance.
Anti-eviction measures for non-payment of rent
Following the latest government review, the anti-eviction measures in the Coronavirus (Scotland) Act 2020 have been extended for six months to 31 March 2021, although this new date could change.
This means a landlord may only terminate a lease after it has given the tenant a warning notice period of 14 weeks (extended from the previous minimum notice of 14 days) to pay outstanding rent.
Remember too that other landlord remedies for non-payment of rent in Scotland remain available: for example, penalty interest, court action or summary diligence.
Landlords will tend to use the eviction option as a last resort only. A property that’s vacant because a lease has been terminated is not an attractive prospect, particularly in the current climate and not least, here in Aberdeen, because of business rates considerations.
When a lease is terminated, the landlord becomes liable for the business rates on an empty property.
And, of course, in the north east, the business rate revaluation postponement until April 2023 means businesses (including landlords of vacant premises) will continue to pay rates based on the historically high 2015 rental values.
Statutory demands and winding-up petitions
The Corporate Governance and Insolvency Act 2020 came into force on 26 June 2020. This introduced temporary measures to help businesses carry on operating through the pandemic.
From the point of view of a tenant who has struggled to meet rent payments, the act puts in place protective measures, restricting landlords’ ability to use statutory demands or winding-up petitions as an enforcement remedy where the financial effect of COVID-19 on a business means the tenant has not paid.
This temporary restriction has been extended until 31 December 2020.
Code of practice for commercial landlords and tenants
Many landlords have been faced with tenant requests for “rent holidays” or other concessions. And, of course, some will have been more sympathetic than others.
The Scottish and UK governments have encouraged both parties to take a co-operative approach and have published a voluntary code of practice.
This is designed to promote collaboration and help landlords and tenants find a mutually acceptable approach to survive COVID-19 disruption and maintain good relations.
The code does not change the legal relationship or lease contract already in place between landlord and tenant, and any guarantor.
For example, the document suggests commercial tenants seeking rent concessions should be transparent and share appropriate financial information. This is so the landlord can better understand what concessions will work to make sure the tenants can stay in the premises, generate cashflow and ultimately satisfy their obligations to pay rent under the lease agreement.
In essence, this ought to prove useful when it comes to determining if a tenant can’t pay, or simply won’t.
On the other hand, the code suggests that landlords should be willing to provide concessions where they reasonably can (taking in to account their own circumstances) and being prepared to be open about any decision to refuse a concession.
While the risk is that concessions may not be enough to save a struggling business, it’s been our experience that landlords have been willing, so far, to support tenants with options like rent holidays, which could mean a reduction in the amount paid, or simply postponing when payments have to be made.
Some landlords may want something in return for a rent concession, such as the removal of a break option. This is where, generally, the tenant can terminate the lease before its term expires.
In any event, it’s important any concession is properly documented.
Looking ahead, as businesses continue to face cashflow pressures, particularly in the hospitality sector, it remains to be seen if landlords will continue to support further concessions, as this approach becomes harder for them to sustain.
Fundamentally while commercial landlords have a few options at their disposal to deal with arrears, it seems co-operation between landlords and tenants makes the most commercial sense as the pandemic rages on.