Harsh and Damaging – Commercial Bargain or Unenforceable Penalty?
The recent case of Permavent Ltd & Anor v Makin has provided additional information to contracting parties about what will constitute a penalty clause.Article
Until recently, if a landlord client wanted a commercial lease drafting, then a traditional, full repairing and insuring (FRI) lease would be the drafting starting point.
An FRI lease is one where the costs of all repairs and insurance are borne by the tenant notwithstanding that the landlord will almost invariably take out the insurance itself and, in the case of a multi-let building, the landlord will carry out the repairs to the common parts. The insurance costs are recovered by the landlord via insurance rent and the costs of repairs to common parts recovered through a service charge.
However, due to the pressures of Covid, and lockdown, many commercial tenants have found themselves struggling to keep their premises open, unable to operate their businesses and unable to pay their rent. Many tenants are therefore reconsidering their position when negotiating the terms of any new commercial lease to ensure that they are, as far as possible, adequately protected in the future.
Conversely, landlords have been restricted by government legislation as to the options available to them in dealing with tenants who have been unable to pay their rent. They too have had to reconsider their position when negotiating new lease terms.
Many tenants are likely to want to negotiate shorter-term leases rather than committing to longer fixed terms, whilst many landlords are likely to want to negotiate longer fixed terms, thus guaranteeing long term rental income.
A possible compromise may be that the tenant agrees to a longer lease term, but with provision for a tenant’s break clause, with several break dates or perhaps triggered in specific circumstances relating to coronavirus or another “pandemic”.
It is usual for traditional FRI leases to include rent suspension provisions, which provide that the tenant does not have to pay rent if it cannot use or access the property (usually due to damage or destruction which the landlord covers with insurance). However, tenants may now look to negotiate an extension of the rent suspension provisions so that they cover situations whereby they cannot use the property because of coronavirus or another pandemic. This may be resisted by Landlord’s, not only to limit rent suspension trigger events, but because it is also not yet clear whether the insurance market will provide cover for loss of rent due to the effects of coronavirus (at all or at a commercially viable cost).
It is usual for a traditional FRI lease to contain rent review provisions, particularly in longer term leases, and it is not unusual to see open market rent review clauses. Landlords almost always insist upon upwards only rent review clauses to guarantee a minimum fixed return during the lease term. Going forward, this may not be acceptable to a tenant, who may push for an upwards/downwards rent review provision to reflect market/global conditions.
Often, landlords will want to control the use of its property and “permitted use” will be clearly defined in the lease. The tenant will be bound to use the property for its permitted use only. The Covid pandemic has seen many business’ having had to adapt to enable them to continue to operate. This has meant using premises for “alternative uses” (one example of such adaptation being the conversion from restaurant to take-away in lockdown). Tenants are likely to resist any unduly restrictive permitted uses within a new lease. A commercial landlord may have to be prepared to factor this into negotiations and be willing to accept provisions within the lease that permit flexible use if the tenant’s business is affected by coronavirus or another pandemic.
There are several potential “new” issues to be considered when drafting, reviewing, and negotiating commercial leases, particularly taking into account the effect coronavirus has had on landlords, tenants and business owners.
BWL’s team of commercial property solicitors can assist with all aspects of commercial lease negotiations and its team of experienced solicitors are happy to discuss any requirements you have.
If you have any questions or queries, please do not hesitate to contact us.