The government's response to the COVID-19 outbreak has significantly shifted the balance of bargaining power to tenants: the Coronavirus Act 2020 limits a landlord's ability to forfeit a lease, whilst the Corporate Insolvency and Governance Act 2020 provides additional hurdles for landlords serving statutory demands and presenting winding up petitions against their tenants. Nonetheless, landlords are reluctant to lose tenants in a stagnant market, where any tenant is better than none. It is becoming clear that the fallout of these drastic measures could re-shape how commercial leases are negotiated and fast-forward an already changing retail sector. This blog is the first of a two-part series that explores what commercial landlords and tenants could expect from future commercial leases.
Turnover rent
A nationwide survey recently conducted by Savills found that 82% of retailers would look to include turnover rent provisions in future leases, whereby tenants pay a specified percentage of their gross turnover achieved at the property.The benefit to tenants is clear: they share some of their commercial risk with the landlord by paying proportionately more rent when times are good, but paying less when times are difficult.However, this rental model can be less beneficial for landlords than a traditional fixed rent alternative. Landlords should consider:
- Insisting on a base rent, to guarantee a minimum level of return and ensure that payment obligations to lenders can be met. This would usually be based on a percentage of the open market rent (often around 80%). If the term of the lease exceeds five years, landlords should also include regular reviews of the base rent.
- Including obligations on tenants to maximise turnover and keep the premises open. If a tenant breaches these obligations, a fixed amount of rent should be payable for any period that the premises are closed / trading has ceased.
- Ensuring that click-and-collect sales and online purchases are included within the definition of turnover, to reflect the growing trend of customers using retail premises as a showroom prior to making purchases online.
Turnover rent leases involve a greater level of collaboration between a landlord and a tenant, and as such, a tenant may well be required to disclose a greater level of information to the landlord (some of which could be commercially sensitive). Nevertheless, it is a good option for tenants looking to reduce their exposure and, in the immediate aftermath of the pandemic, it may be an acceptable option for landlords trying to secure new tenants in a difficult economic climate.
Suspension of Rent
Suspension of rent clauses are included in commercial leases as standard, but generally only cover a situation where the property is damaged or destroyed so that a tenant is unable to occupy or access the property.During the pandemic, many retail and hospitality tenants found themselves unable to occupy or access their property, but were still obliged to pay the full rent. We therefore predict that many tenants will seek to include suspension of rent provisions to cover these circumstances going forward.If they are inclined to agree to this, landlords should ensure that the suspension or reduction of rent is conditional upon insurance being in place covering loss of rent for inability to trade due to a pandemic. Whilst this is somewhat of a moot point in current times (as such cover is not widely available now) it may still prove an attractive comfort blanket to tenants in the future.The next article will further explore the potential effects that the pandemic may have upon the provisions of commercial leases from both a landlord's and a tenant's perspective.
If you would like advice on your particular property, please contact us to discuss how we can help you.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.