Cost of living – The impact on real estate

In the first of a series of articles looking at how mid-market firms can navigate their way through the cost-of-living crisis, Holly Hill, senior associate in the real estate team at Mills & Reeve, looks at the impact on commercial tenants.

Companies could find themselves in a difficult position to pay their rent again due to skyrocketing energy costs and rapidly rising rates of interest.

The current situation is not new. Many commercial tenants were unable to pay their rent due to forced closures and the lack of trade that resulted from the pandemic.

The government quickly intervened with emergency legislation, which placed a moratorium against landlords taking action against tenants who were not paying rent.

Landlords were unable to bring commercial debt claims, exercise CRAR (taking control of a tenant’s goods to sell at auction), forfeit leases, or present winding up petitions in respect of rent arrears which accrued during the pandemic.

Further legislation established a binding arbitration process where landlords could refer Covid rent arrears to tenants, in the absence a contract between them about how much they should pay.

The scheme’s guiding principle was to ensure that businesses that were financially viable but could not pay rent debts were able survive.

With companies facing massive increases in costs, will there be additional legislation to protect commercial renters against forfeiture and civil claims, CRAR, and insolvency proceedings?

Unfortunately, it is unlikely. There are however steps commercial tenants can take in order to weather the storm of the cost of living crisis.

A tenant might be able to request a renewal lease after the term ends, especially if market rents have dropped.

If the lease is not subject to statutory protection, the tenant can obtain a new lease at the current market rate, but on the same terms.

The market rent can either be agreed between landlord and tenant, or set by the court in default.

In addition to determining the market rent, the court has the power to include provisions in the lease for varying the rent; as well as the discretion, considering what is fair and reasonable, to impose further lease renewal terms having regard to the terms of the current tenancy and “to all relevant circumstances”.

The courts might decide that there are sufficient circumstances for imposing more flexible lease terms. This could include shorter lease terms, frequent/rolling tenants breaks, upwards/downwards rent review, and/or turnover rents.

Flexible terms are becoming more acceptable in the commercial property market. Landlords may be more willing to accept flexible terms in order to attract tenants.

Tenants in the middle of their leases who are having difficulty paying rent may want to contact their landlord to ask if they will consider a rent concession. This can easily be documented in a side letter.

Landlords might be willing to negotiate rent concessions to keep tenants in occupation and pay some rent, instead of forfeiting the lease or forcing them into insolvency.