There has been much discussion of late around the effect of COVID-19 on leases, focusing in particular on the non-payment of rents by tenants and the limitation on the landlord’s usual arsenal of options for non-payment. As the lockdown eases and tenants prepare to return to their premises, there are likely to be other lease provisions which need to be considered by landlords and tenants. This article considers a number of typical lease provisions which tenants may like to consider.
- Rent Free Periods. There are likely to be a number of tenants who signed leases shortly before the lockdown came into effect and who should have been using this time to fit out their premises. Landlords will typically grant tenants rent free periods at the start of their leases to allow them to carry out fit out works before the rent becomes payable in full. If a tenant has been unable to make use of this period because contractors either could not commit to signing a building contract to carry out the works, or have been prevented from accessing the building to actually carry out the works, it would not be unreasonable for a tenant to ask for an extension to the rent free period to reflect the period of delay to their works.Landlords may be amenable to extending rent free periods in this manner, including during any future tightening of the lockdown following a second wave of infection. From a landlord’s perspective they may want to consider both a cap on the maximum permitted extension and/or extending the lease term by a corresponding period, so as to ensure the actual rent free period afforded to the tenant does not appear disproportionate or excessive in the market given the length of term.
- Alterations. To ensure proper social distancing, it is almost inevitable that some works to all commercial premises are going to be required before employees can safely return to work. How much latitude a tenant has to carry out these alterations without requiring landlord’s consent will always depend on the specific terms of each lease. In very broad terms, landlords generally want to either prohibit or strictly control external or structural alterations to their buildings, and (other than in very short term leases) internal alterations not affecting the structure of a building are permitted either with or without landlord’s consent.Tenants will therefore need to review their leases to ascertain the extent to which landlord’s consent to the re-configuration of their premises is required. We have already seen in the retail sector the sort of changes which have been introduced to preserve social distancing (screens at checkouts, floor markings for queues etc). In offices, partitioning may well need to be installed or reconfigured (which may have an effect on a landlord’s building management systems), as well as works required to install additional stations for hand sanitisers (which may be affixed to walls). Meeting rooms may need to be reconfigured or repurposed as additional workspaces, which in turn may require additional IT infrastructure to be installed. If tenants have space for catering, then further measures to ensure safe preparation of food in the kitchen and social distancing in the cafeteria area may require alterations to those spaces.Given that it can take time for a formal licence for alterations to be completed, a number of tenants may prioritise carrying out the works to allow their staff to return to work sooner rather than later and seek consent retrospectively. Although that would be a practical approach especially if the nature of the alterations is not extensive, the well-advised tenant will (where required) still seek consent in principle before doing so, as if not they do risk exposing themselves to a claim for breach of lease from their landlord. They will also need to document the consent as soon as possible, even if retrospectively, to ensure the alterations are properly authorised and so disregarded on rent review under their lease.
- Service Charge. It is not only tenants who will need to make changes to their premises; landlords of multi-tenanted buildings will need to alter the common parts of their building to respect social distancing requirements. This could include installing queuing systems for lifts or staircases, signage reminding visitors to respect social distancing, hand sanitisers in common parts and providing PPE for staff working at the building (receptionists, security and cleaning personnel). Landlords may wish to try to increase the amount of cycle storage made available to their tenants to assist those who do not wish to use public transport, and will need to make changes to the way any shower and locker facilities are used. Changes may also be required to the way mail is received into, and distributed throughout, the building.Generally, landlords are also likely to increase the frequency of cleaning services provided to the building, to ensure more comprehensive cleaning is carried out more regularly, in particular to high traffic areas such as circulation areas (lifts, reception etc), toilets and showers and locker rooms.The cost of these changes and the additional services will likely be passed on to tenants through the service charge, so tenants will need to keep carefully reviewing their service charge demands to ensure the costs are reasonable and appropriate.
- Rent review. As is usual, tenants need to ensure that any works they carry out to their premises are disregarded for rent review purposes. But if a rent review date has arisen during the lockdown period, are there any other implications for rent review? For example, leases often have an assumption that landlords and tenants have complied with their lease obligations, other than for a material and/or persistent breach by the landlord. If a landlord has closed a building and prevented access for its tenants during the lockdown, could that constitute a breach of quiet enjoyment and therefore impact on rent review?The current situation will undoubtedly have an impact, in the short term at least, on market rents. If a rent review falls to be determined around the time of the lockdown, tenants will need to look closely at the rent review provisions in their leases to see the extent to which the drafting potentially helps their position.
- Existing Consents. Some tenants may have been contemplating changes to their premises before the lockdown started, for example carrying out alterations or looking to sub-let space to others. If landlord’s consent has already been obtained but the relevant matter has not been able to progress during the lockdown, then tenants will need to check the terms of the landlord’s consent to ensure it is not time limited. Landlord’s often grant consent on the basis that the alterations are started, or the subletting completed, within a certain period (3 months is typical), so tenants need to ensure they are not caught out by lapsed consents, and so unintentionally commit a breach of their lease.
As the return to work gathers pace there is likely a need for closer co-operation between landlords and tenants to ensure that buildings can be safely re-occupied and reopened for business, which is in the interests of both parties. There is much practical guidance being issued for landlords and tenants, but the parties should not forget their lease obligations.
If you wish to receive periodic updates on this or other topics related to the pandemic, you can be added to our COVID-19 “Special Interest” mailing list by subscribing here. For any other legal questions related to this pandemic, please contact the Firm’s COVID-19 Core Response Team at FW-SIG-COVID-19-Core-Response-Team@mayerbrown.com.