30th March 2020

Coronavirus: Commercial Property implications and advice – Part I

The UK and Scottish Governments have introduced measures to assist businesses in Scotland to cope with the impact of COVID-19 and, in particular, they have provided for a number of rates reliefs and grants. There are also many other challenges facing business including those that affect landlords and tenants of commercial leases.

Non-domestic rates
The following changes to non-domestic rates (business rates) for 2020-21 have been made to date and we will provide updates as they become available.

  1. All non-domestic properties in Scotland will get a 1.6% rates relief. This relief effectively reverses the change in poundage for 2020-21. This relief does not have to be applied for and will automatically be reflected in your bill (applied by your Local Authority);
  2. Retail, hospitality and leisure businesses will receive 100% rates relief. To qualify for this relief, a property had to be occupied, however, it has been announced that properties that have closed temporarily due to the government’s COVID-19 advice will be treated as occupied.

Each individual local authority will be able to assist with this relief and you should contact your relevant Local Authority for more information. Contact information can be found on your non-domestic rates notice. These reliefs will be available from 1st April 2020 until 31st March 2021. It should be noted that at present there is no automatic relief for the other classes of property out with the categories mentioned above. Please bear in mind that this means that present you are liable to continue paying business rates. This position may change in the near future especially in light of the emergency legislation issued by Parliament to stop the spread of Coronavirus and giving the Government power to close of restrict access to premises (which could result in prosecution for non-compliance). That could result in premises being left empty unused and therefore “vacant” for rating purposes. There has also been commentary that the current lockdown situation, where Government guidance is that people should not go to their place of work, and retailers should close, may allow a claim against liability for non-domestic rates. We await further Government updates on this in the next few days.

The Scottish Government have also introduced a one – off grant that will be available to some businesses. These Grants can be applied for from 24 March 2020 and available until 31 March 2021. See whether or not you qualify for the one – off grant.

Insurance
A question that has arisen this week in light of the recent announcement by the Government on 20 March 2020 for certain businesses to close is in relation to insurance and whether businesses could make a claim under their current insurance policy. It is important to highlight that if you are concerned about the impacts of Covid-19 then we would recommend that you please check with your insurance adviser or broker to establish the extent of your cover.

Business Interruption Insurance
Business interruption insurance covers a business for loss of income during periods when they cannot carry out business as usual due to an unexpected event with the insurance company essentially compensating the business for losses/expenses incurred as a result of the interruption to trading. These policies generally provide cover where premises or equipment are damaged by a named risk whereby the building cannot be used (such as fire, flood, storm etc). There are also policies covering business interruption as a result of staff/employees/persons being unable to access the business in certain events (such as the property being cordoned off due to terrorism, risk of collapse, fire).

Business interruption insurance can be costly and is generally an extra risk added to a standard business insurance policy that is designed to cover standard risks. It is therefore unlikely that such standard policies would cover the effects of global pandemics like COVID-19. Each policy will be tailored to your specific needs and will differ from business to business and so the extent of your policy would need to be reviewed. If your business has an extension to your standard cover for both pandemics and government-ordered closure then you may be covered in this situation. It is, however, estimated that most businesses are unlikely to be covered, as standard business interruption insurance policies are dependent on damage to property and will exclude pandemics. It is vitally important to check the definition of your business interruption cover to ascertain if there is cover is potentially available

Loss of Rent Cover
Another form of insurance cover that could provide relief to Landlords is Loss of Rent Insurance. Loss of Rent Insurance covers the money a Landlord would lose, if the property becomes uninhabitable due to an insured event (e.g. a fire or flood), resulting in the Tenant being required to move out and being relieved from paying rent while they are not occupying the property. It is important to have your policy wording and definition checked by your insurance broker to see if you may be covered for loss of rent due to infectious or notifiable diseases. If there is an extension to your standard policy then you may be covered for loss of rent as a result of COVID -19.

It should be noted that at the moment we consider that it is unlikely that insurance companies will pay out as a result of loss of rent due to COVID -19. That could change though, particularly if there is Government intervention.

Rent Payment Considerations
What options are available to commercial Tenants in the current climate? A Tenant under a commercial lease is generally not permitted to withhold rent in any circumstances (unless the Landlord has agreed to the rent being withheld) and rent will still be payable and will not be suspended due to COVID -19. Non-payment of rent is a breach of the terms of a lease and a Landlord could raise an action against the tenant for breach. However, we wouldn’t expect to see that happening in the short term. Any Tenants who do decide to stop paying rent, and their Landlords don’t take any action due to COVID -19, should bear in mind that they will build up rent arrears that will need to be paid eventually.

As many retail, hospitality and exercise facilities are being forced to close, is there any remedy to a Tenant when they are unable to generate an income, however, still obliged to pay all outgoings (including rent)? We would recommend that your first port of call is to contact your Landlord to open up a dialogue, either directly or via your solicitor. Your best options would be either a (1) reduction in your rent; (2) change from quarterly or monthly or weekly rent payment, or (3) a rent-free period/holiday. You should also bear in mind that if you and your Landlord agree to one of these options, you may still end up having to make up the difference or balance of any rent payments. There is no obligation on your Landlord to agree to this, however, in the long-term this could minimise the potential financial impact on all parties. We all find ourselves in unprecedented times and any concession is at the Landlord’s discretion (and this will also undoubtedly depend upon their financial circumstances). If the parties agree temporary rent payment terms, we recommended that those are documented by way of a back letter (a letter that does not form part of the lease itself, but can detail temporary arrangements between the parties). Provided the parties agree on the terms, this letter should be able to be prepared by your solicitor without too much of a delay.

From the Landlord’s perspective, they may wish to include adequate provision that the Tenant continues to pay rates, insurance, utilities and all other outlays in terms of the Lease. It would also be recommended that the Landlord reserve the right to require payment of any temporarily waived amounts as and when trading resumes to normal (or as other circumstances permit, such as Government intervention or an insurance pay-out alternative).

On 23 March the UK Government announced protections for commercial tenants in England and Wales against forfeiture and eviction if they miss rent payments due in the next three months. As yet, there has been no similar announcement by the Scottish Government, however, it has indicated that it will soon bring Coronavirus legislation to the Scottish Parliament and we would expect similar provisions to be included.

Circumstances are changing daily. Please don’t hesitate to contact a member of the Blackadders Commercial Property Team for advice and assistance in these difficult times.

Jennifer Davidson, Associate Solicitor
Commercial Property
Blackadders LLP

www.blackadders.co.uk

 

 

The opinions expressed in this blog are of the author only and do not necessarily represent the opinions of Blackadders LLP.

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