Commercial landlords and tenants: Reasonableness is key
Published: 20 April 2020
In light of the Covid-19 pandemic and the inevitable economic difficulties it has caused, the Government has issued new guidance for commercial landlords and tenants. The guidance is self-admittedly only ‘advisory’, however it makes it clear that a failure to heed it will find little favour in the Courts. Landlords and tenants should bear in mind that certain standards of conduct are expected from them and the underlying approach to be taken is one of reasonableness.
Be open, be transparent and above all, be reasonable
These three qualities are specifically called upon in the Government guidance. The Courts and Government are not seeking to unnecessarily intervene in the freedom of contract of private contractual relationships but they are keen to encourage an environment of flexibility and pragmatism during the Covid-19 period. After all, when normality resumes, it will be in everyone’s best interests to have retained productive and amicable relationships in the interim. Action during these hard times will be remembered for years to come. The long game needs to be played and prospective hindsight employed.
The need to be open and transparent is really as simple as ensuring an honest and frank dialogue with your counter-party and to appreciate the difficulties from each other’s perspective. Work on constructive and long term solutions together, not as adversaries. Do not put off a conversation because a hostile response is expected. In most cases, a pleasant and co-operative response may await you. A friendly conversation now may help alleviate potential difficulties further down the line. At least, that is what is expected by the Courts. If a dispute is heard before them they will scrutinise the degree of reasonableness applied, or lack thereof, and this will influence the ultimate decision including the amount (if any) of compensation.
Temporary voluntary arrangements
The guidance encourages landlords and tenants to enter into temporary voluntary arrangements in relation to their respective contractual obligations, which may be difficult for either or both of them to comply with at present.
From a tenant’s perspective, funds to cover rent and other costs due under the lease may be difficult to find. Appropriate workarounds can include full or partial payment deferrals, full or partial rent holidays, temporary rent reductions, or an early termination of the lease.
A tenant’s obligations will also likely to extend to certain maintenance works such as repairs and re-decoration. These should also be managed in any temporary arrangement.
Although less likely, Landlords may also find themselves unable to comply with the lease terms, for example, in relation to their own repairing obligations. The provisions for temporary voluntary arrangements allow for both parties to grant concessions from their obligations to each other and within the context of mutual fairness. Neither party should be unfairly disadvantaged.
Demonstrate difficulty… and do so quickly
Temporary arrangements are not a given or an obligation. The party seeking a deviation from the lease terms must demonstrate their inability to comply as usual. Tenants are required to give at least one week’s notice of any anticipated financial difficulty and how this has stemmed from Covid-19. Supporting evidence must also be produced.
If a Landlord, acting reasonably, cannot comply with a tenant’s request to forego financial obligations, they too are required to evidence what financial difficulties they find themselves in that would prohibit them from accepting lesser or delayed amounts from their tenant.
Both parties will also want to consider entering into a confidentiality agreement as to the financial and other potentially sensitive information being exchanged between them.
The need for openness, transparency, and reasonableness does not just apply at the point of entering into a temporary voluntary arrangement. It is expected to endure throughout the Covid-19 period and both parties should endeavour to keep each other updated as to their own circumstances. If finances change for the better and higher amounts can be afforded this should be made clear and applied without delay. Pro-active, co-operative, and honest attitudes will go down well with the Courts.
No agreement – why not?
Whilst the premise of the guidance is that both parties should enter into such an agreement ‘voluntarily’, it can only be expected that the Courts will expect a high standard of evidence as to why such an agreement cannot be entered into by either party.
It is important to note that the guidance does not extend to pre-existing contractual breaches such as rent arrears accrued prior to the Covid-19 period, provided that these have been intimated to the party in breach.
Finally, do not leave it to chance, no matter how friendly any discussions have been
It is crucial that both parties have a clear understanding of their respective intentions and what is eventually agreed between them.
Any temporary voluntary arrangements should be formalised in writing with both parties taking legal advice. The hope is that subsequent disputes can be avoided but if not, the court will look at the written arrangements and will enforce these in the context of the overarching principal of reasonableness.
To discuss any of the points made in the article and to hear more about how Viberts can help with your temporary voluntary arrangement, please contact Emily Paris-Hunter, ensuring to have a copy of your lease and the details of your landlord or tenant readily available.