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Rent and Service Charges – COVID19 crisis

Most commercial premises are governed by a lease, which is a legally binding contract between the landlord and the tenant. Despite the COVID-19 outbreak, the contract generally carries on unchanged, so rent and service charges remain payable. We fully understand that this will be extremely challenging for many and we have therefore set out some guidance below, which we hope will be helpful in trying to meet ongoing obligations.

Don’t ignore the issue. Landlords want to engage and will be keen for your business to trade through these difficulties. Contact your landlord or managing agent if you are experiencing payment difficulties. Generally, the sooner the discussion starts, the better.

Be realistic. For some businesses the effect of mandatory closure has been immediate and extensive. For others, the effect may be building slowly and concern may be centred around future liabilities rather than immediate cash-flow. A smaller number of business may have experienced little change to their cash-flow. Needs will vary on a case by case basis, so make sure you are reasonable, honest and transparent in your dealings with your landlord.

Ensure you obtain all eligible support. The government are bringing forward support initiatives in several ways. The approach is currently to fund businesses directly through grants, loans, employment support and tax initiatives. Some of these packages are quite generous and although not a complete answer to the problem, they will certainly help. Make sure you obtain all benefits you are entitled to, so that you are best placed to meet your liabilities and keep your business going. There are links to support packages on our website.

Consider your options for credit. The government has announced the Coronavirus Business Interruption Loan Scheme which provides guarantees to support business loans on preferential terms. Landlords are not able to offer finance packages in anything like the same way, if at all. Research all the options open to you if you need funding to help with cash flow or liquidity.

If you cannot pay in full, pay what you can. Landlords will generally be much more sympathetic to a tenant who has made a genuine effort to meet obligations even if they cannot pay in full. Managing your obligations if you are experiencing payment difficulties will be an exercise in goodwill. If you are asking your landlord for flexibility, show integrity by paying as much as you can, as soon as you can. This will not guarantee a positive response but is more likely to lead to a balanced discussion on the matter.

Have a payment plan. Landlords are far more likely to be receptive to an approach which has been considered and which has clarity on settlement. For example, the government have announced a scheme of cash grants which are expected to be paid in early April. Most rent is due on 25 March, so there is an unfortunate delay between rent becoming due and support payments being made. Most landlords will distinguish a short-term funding issue arising from the timing of these payments but will want to know how you are intending to pay the rent and when. Think about this carefully and be explicitly clear about what you are asking from the landlord.

Do not assume that landlords have unlimited resources. It is a common misconception that landlords are wealthy individuals or corporations who have large financial resources. Regrettably this isn’t always the case. Most landlords are working people with families, mortgages, bills and other commitments, just like everyone else. Your business may be selling clothes, repairing cars or renting photocopiers; their business is renting property. They rely on the rent to meet their obligations in the same way that other businesses rely on their clients paying them for goods or services. Many landlords also have their own regular businesses, so may also be plumbers, builders or accountants etc as well as property owners. Most landlords will be sympathetic to your difficulties, but will be struggling with their own pressures which may well be very similar to your own.

Service charges are needed to keep your property operating. Service charges cover the cost of running the site or building in which you are located. This often includes essential matters like utilities (gas, water, electric etc), cleaning and keeping the property safe. The landlord may struggle to keep these services in place if there are no funds to do so. Landlords make no profit from service charges, so consider them to be a basic cost of occupation along with telephones and insurance etc.

Remember that the rent will need to be paid in due course. Landlords will consider genuine hardship on a case by case basis. However, restructuring of debt does not avoid the ultimate liability to pay. Interest may also be added to unpaid amounts where agreed with the landlord or where provided for in the lease. It is therefore better to pay as much as you can as soon as you can to minimise any additional charges for credit. You will also need to budget carefully for repayment if concessions are agreed.

Keep communicating. This is a situation which is changing daily. Keep your landlord informed and if your circumstances change, either for better or worse, let your landlord know. As always, be open, honest and transparent

Oldfield Smith & Co are Chartered Surveyors based in Uckfield and Gatwick professional services, agency and management services in relation to commercial property on a nationwide basis.

The above advice is offered as a general guide only and is not a substitute for a formal professional opinion. If in doubt, please seek advice from a Chartered Surveyor, Solicitor or other suitably qualified person. This information is supplied in good faith but without liability and is based on circumstances and published guidance on 26 March 2020.