Cost of living – the impact on real estate

Holly Hill, senior associate, Mills & Reeve

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.

With soaring energy bills and rapidly rising interest rates, companies may once again find themselves struggling to pay their rent.

The current dilemma is nothing new. Enforced closures and resulting lack of trade during the pandemic left many commercial tenants unable to meet their rental obligations.

Back then the government hastily stepped in with emergency legislation which placed a moratorium on the usual actions available to landlords against non-paying tenants.

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 introduced a binding arbitration process to which landlords and tenants could refer Covid rent debts, in the absence of agreement between them as to how much the tenant should pay.

The guiding principle behind the scheme was to ensure that businesses who would be financially viable, but for their rent debts, were able to survive.

Now with companies facing huge hikes in costs, will the government introduce further legislation to protect commercial tenants against forfeiture, civil claims, CRAR and insolvency proceedings?

Unfortunately, the answer is most likely not. However, there several steps commercial tenants can take to help weather the storm of the cost-of-living crisis.

At the end of the fixed term of their lease the tenant may benefit from requesting a renewal lease, especially where market rents have dropped.

Unless the lease is contracted out of statutory protection, the tenant will be entitled to a new lease, on the same terms as its existing lease, but at the current market rent.

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

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 may consider that there are sufficient circumstances to impose more flexible lease terms such as shorter lease terms, frequent/rolling tenant breaks, upwards or downwards rent review and/or turnover rents.

The commercial property market is becoming increasingly more accepting of flexible lease terms. In a bid to attract tenants, landlords may be willing to accept such terms at the outset of a lease, or without recourse to court for renewal leases.

For tenants in the middle of the term of their leases struggling to pay rent, it could be worth approaching the landlord to establish whether it will agree a rent concession which can be documented in a simple side letter.

Landlords may be willing to agree rent concessions to keep a tenant in occupation paying some rent, rather than forfeiting the lease or forcing the tenant into insolvency and ending up with an empty premises.