Fact Sheet: Beyond Covid-19 – How can commercial landlords and tenants compromise now?

It has been so encouraging to see shops, bars and restaurants take their first tentative steps out of lockdown, but it’s probably fair to predict that it will not be business as usual for the foreseeable future: changes in consumer habits and routines, financial uncertainty for many, and simple fear, will all continue to impact directly upon the ability of commercial tenants to cover the rent.

In a recent piece, we talked about whether or not these tenants remain obliged to pay the rent during the unprecedented set of circumstances we find ourselves in. The conclusion was compromise; yes, the rent should be paid, but keeping tenants intact and in situ would also be high on the list of landlord priorities.

When it comes to compromising for the benefit of both parties to a lease, there are no hard and fast rules, but here are some of the possibilities to consider.

Adjustments to rent

Rent free periods

  • A basic incentive – rent free periods are often used to incentivise new tenants to take on new leases – the GFC over a decade ago saw a huge increase in their use, and the current situation will continue to guarantee their popularity. And they might not be as unpalatable to landlords as they first appear – a one-time short sharp income-free period might be all that’s needed to get a tenant through the worst, or to get a new tenant into vacant premises.
  • Rent free after break date – scheduling rent free periods just after a break date is a well-trodden path for landlords to incentivise tenants to stay put beyond a potential future exit point, and makes sense in the current climate. Tenants will be looking for relatively short-order break options – they need to see how things unfold in the short to medium term. Any incentive to keep them in place beyond a break date will benefit the landlord and the cost of a rent free period can be offset against re-letting costs.
  • Deferred Payment – can a tenant see its way to deferring any unpaid rent until a later date? Whilst there are cash flow benefits for the tenant, there is risk here on both sides – rolling up liability for the tenant, and no guarantee that any deferred rent will ever be paid if the tenant cannot recover longer term.

“Structured” Rents
Looking slightly beyond the immediate crisis, a certain level of rental income is going to be required, with added pressure on landlords because of debt secured on property and obligations and covenants related to servicing that debt. Parties to existing or new lettings might think about the following:

  • reduced rent – either a reduction in a current rent or a lower starting point than would ordinarily be agreed in a new lease;
  • stepped rent i.e. dropping the rent to (or starting at) a lower level and then gradually increasing it again; and
  • a turnover rent – whilst on the face of it these might be wholly unpalatable to landlords in the current situation, they may offer some degree mutual benefit. Consider structures whereby the tenant pays a base level of rent, topped up according to the tenant’s income (i.e. a fixed percentage of the tenant’s net turnover). Over a temporary period, this could serve to provide the landlord with a certain amount of income whilst recognising the difficulties faced by so many tenants. Please see our piece “Beyond Covid: A Turnover Rent Resurgence?” for more detailed discussion.

Any of these structures could work in tandem with an element of deferred rent as described above.

Other financial concessions
Other options worthy of consideration include the following:

  • rent paid monthly instead of quarterly;
  • rent paid in arrears rather than in advance;
  • temporarily reduced service charges;
  • all-inclusive charges – where rent, insurance and service charges are payable at a fixed flat rate for a period of time at a level manageable for both parties; or
  • an express plan for a landlord to draw on any rent deposit whilst the tenant takes a rent holiday.

A “second wave”?

Looking beyond solely the rent provisions, here are some further points to consider.

  • Can a period of rent suspension be agreed pre-emptively? Suspension might be during periods of further government-ordered national or local lockdown, or during the imposition of restrictions which would affect the operation of a tenant’s business whether due to closure, or restrictions such as social distancing which would impact on the scale of its operations.
  • Break clauses are likely to be firmly on the radar too. We may see break dates falling slightly earlier in the term of new leases than before, or simply more of them during the term of a lease, or perhaps rolling breaks i.e. the option to break at any time subject to a notice period. Such rolling options might be exercisable up until a certain date in the term. We talk above about linking later break dates to rent free periods to incentivise tenants to remain in occupation rather than to break.
  • Whilst rather tenant-friendly in the shorter term, concessions may provide a degree of landlord leverage – parties to existing arrangements might for example settle an outstanding rent review, or perhaps delay a rent review until there is a generally more positive outlook. Landlords might achieve the removal of future tenant break clauses or other particularly tenant-favouring provisions in return for fairly generous short-term concessions.

Compromise with caution

If a compromise can be reached, always consider the following:

  • carefully document the time period for which any concessions will apply, and how and when any deferred rent will be paid;
  • does the letting document in question contain any break clauses, and is it conditional upon payment in full of rent (or any other sums) up until a given date? Ensure that the operation of the break is not frustrated by reason of payment of a reduced rent, or no rent, however temporary;
  • are there any rent reviews due during any concessionary period? Be express about how the parties intend any concession to impact on rent review – will it be disregarded or not?
  • is the lease potentially due for renewal? Beware the possibility of concessionary terms being carried over into a new lease – existing terms are often the starting point for renewal leases, particularly those within Part II of the Landlord & Tenant Act 1954;
  • are the concessionary terms, however temporary, binding either parties’ successors in title?
  • if there is any guarantor who will need to be a party to documentation? Make sure that they are so as to avoid inadvertent release from guarantor obligations;
  • are any third party consents required, from lenders or superior landlords or the like? Obtain these so as to avoid a breach of superior lease covenants and/or loan documentation;
  • check rent deposit arrangements and whether even an agreed payment of a reduced or nil rent would amount to a failure to pay rent, and an entitlement for the landlord to draw on any deposit.With new rent deposits, be clear as to whether they can be drawn upon during any pre-agreed period of potential rent suspension or reduction – a tenant may see an ability to draw as defeating the object of rent suspension, but a landlord might argue that it still offers some breathing space for the tenant;
  • if documentation needs to define a trigger for any future concession arrangement i.e. further lockdown or other similar restrictions to manage Covid-19, ensure that any definitions work for the specific lease, tenant, business, or location in question; and
  • if leases are varied (rather than concessions being made) always seek tax advice particularly in respect of Stamp Duty Land Tax.

Fact Sheet: Beyond Covid-19 – A Turnover Rent Resurgence?

Would-be commercial tenants no longer know whether to take on a new lease. Existing tenants are looking for ways to adjust arrangements with landlords in order to survive the impact of the recent lockdown. Could something reminiscent of the traditional turnover rent now be a way to pin rental levels to the performance of a tenant’s business, during a unique period of economic uncertainty?

Yes, but whereas historically, turnover structures would see a landlord share in the very good times with the tenant, we’ve now seen measures undertaken on a global scale which have had an unmatched negative effect on the performance of businesses with a necessary physical presence – cafes, bars, restaurants, and retail.

Whilst some sectors have thrived – data, hosting, and connectivity, as well as e-commerce and the tech industry – some others have seen their revenue decimated and through no fault of their own; not many businesses could have foreseen to protect themselves against the consequences of coronavirus.

Whilst we cautiously emerge from lockdown and do all that we can to avoid a second wave of the virus, the turnover rent approach could prove a useful tool, for both new and existing commercial tenants.

Traditionally, turnover structures would see a base level of rent paid (usually around 75-80% of the open market value), and a top-up element which would be a percentage of the tenant’s net turnover over a given time period – usually between 5-12%.

This would generally have to be in tandem with a landlord option to fall back on a full open market rent if turnover fell below a certain threshold, and in some specific cases, keep-open covenants by the tenant such that turnover could be optimised – obviously for the purposes of making life easier in the current circumstances, an ability for the landlord to do either of these things would defeat the object somewhat.

If we assume a period of zero turnover (no longer unthinkable), a base rent would at least provide the landlord with some degree of certainty of continued rental income, and some capacity to satisfy any related loan obligations and covenants. At the same time, the tenant might be cushioned from the very worst of any ongoing or renewed impact on its business.

But many businesses occupying commercial premises are no longer holding back in requesting full turnover rents across entire existing portfolios i.e. no base rent, solely a rent linked to turnover.

On the face of it, this will be hugely unpalatable to commercial landlords, but faced with the dual prospect of tenants that simply won’t survive if they must pay rent over and above a level linked in some way to their income, and a potentially pretty tough lettings market, turnover only structures might begin to look more feasible, perhaps even as a temporary measure.

A deferred rent structure in place alongside a wholesale turnover rent might soften the blow i.e. allow the tenant to pay a turnover-only rent, with a structure to claw back a perceived “shortfall” once certain conditions are met, or at a certain point in the term. These structures carry some risk in that there’s no guarantee the tenant will ever be able to pay the shortfall in the future, and if used, they should be carefully documented as to exactly how the shortfall will be calculated and with reference to which income figures, and when and how it is expected that any shortfall will be paid to the landlord.

And what else is there to look out for?

Turnover rent provisions in leases are reasonably complex, and the gathering and provision of evidence of turnover, as well as the potential professional verification or audit of calculations can be burdensome and costly. These calculations also have great potential to lead to dispute. Any party considering a turnover structure must take expert advice, and ensure that there is appropriate provision in the lease for dispute resolution.

The parties will also need to be clear on what is and is not regarded as turnover.

Traditionally, items such as VAT on goods, refunds or credits for returned or faulty goods, or allowances for exchanged or traded in goods, or customary discounts given by a tenant, would all be discounted for the purposes of calculating a net turnover. Tenants will be keen to carve out income from online sales too i.e. that not generated on the premises in question.

Implementation of a turnover rent would also be the time to consider re-tightening returns policies for goods sold – many retailers relaxed and extended these during the height of the lockdown, but when it comes to turnover rent estimates and calculations, good turnover visibility is important.

Whether agreeing new terms or amending existing ones (whether as temporary concessionary arrangements or via more permanent variations to leases), rent review and alienation provisions are also matters to consider.

How is any turnover rent, whether a temporary or permanent arrangement, to be treated on rent review? Will “usual” assignment and subletting provisions apply? Or, did the landlord envisage a turnover rent with one specific tenant in mind? If an assignee or subtenant coming into occupation on any basis remains a possibility, will the turnover rent provisions be suspended for all or part of the remainder of the term, and if so, what will the substitute rent be?

Lastly, the following should always be kept in mind if changes are being made to existing arrangements, whether they manifest as concessions or variations:

  • the circumstance in which, and for how long any temporary arrangements apply;
  • whether the operation of any break option could be frustrated by reason of payment of a reduced rent, however temporary;
  • whether the parties’ successors in title are bound by any new arrangements;
  • whether any guarantor needs to be a party to new documentation;
  • whether any third-party consents are required, from lenders or superior landlords or the like;
  • rent deposit arrangements, and whether they can be drawn upon if a turnover rent produces a perceived shortfall as against the usual full rent; and
  • where changes to existing leases amount to a variation, always seek tax advice particularly that pertaining to Stamp Duty Land Tax.

Fact Sheet: Update on Telecommunications Infrastructure (Leasehold Property) Bill 2019-21

The Johnson government plans to roll out UK-wide gigabit-capable broadband by 2025.

The Telecommunications Infrastructure (Leasehold Property) Bill 2019-21 is set to amend the 2017 Electronic Communications Code, so as to streamline the process by which network operators may gain access to multi-let residential properties.

It is hoped this will deal with the particular problem of the landlord who is unresponsive to requests to allow access.

Fact Sheet: Renegotiation – An art not a science

Chances are, that as a result of COVID-19, you are either going to have to seek to renegotiate your agreements with another party or deal with parties wishing to do so with you.

In respect of renegotiation, here are some points to consider…

Fact Sheet: Covid-19 – Should commercial tenants still pay the rent?

Yes they should, where possible, but less than 30% of commercial property rent was received by landlords for the March 2020 quarter.

There is an urban myth in circulation that tenants no longer need to pay their rent to landlords; that the government has instructed them not to; that they can shut up shop, cancel the rent payment, and with any luck, pick up where they left off when things are back to “normal”.

Landlords urged to be aware of ‘Faster Broadband’ legislation, FM Briefing

Landlords are being advised to be aware of forthcoming legislation designed to assist in the Government’s commitment to the roll out of faster more resilient broadband across the UK by 2025.

The call comes from specialist advisory firm Conexus Law as a reminder about the Telecommunications Infrastructure (Leasehold Property) Bill 2019-21, which is set to amend the 2017 Electronic Communications Code to streamline the process by which network operators may gain access to multi-let residential properties.

It is hoped this will help to deal with the particular problem of the landlord who is unresponsive to requests to allow access, something that is recognised as a major obstacle to meeting the Government’s target.

Emma Cordiner at Conexus Law said: “Though it is difficult to argue against the motivation for the bill, some private landlords may see it as bordering on the draconian. However, timely responsiveness and collaboration by landlords should avoid forceful operator action, so now (as ever) would be the time for all landlords to adopt good habits and pay closer attention to any operator requests for access to install infrastructure.

“At this stage, landlords need to have the bill on their radars, and in spite of the bill, might do well to plan the implementation of broadband infrastructure policies for their buildings, with one eye on a forthcoming need to be more responsive to operator requests. Ultimately a well-managed property with the best of broadband capability will only ever be an attractive prospect to tenants.”

Source: facilitiesmanagementforum.co.uk/landlords-urged-to-be-aware-of-faster-broadband-legislation

Fact Sheet: Health and safety obligations for employers related to Covid-19

As an employer you have a duty of care to your employees and should continue to take all reasonably practicable steps to ensure their health, safety and wellbeing. This applies whether they are working from your premises or elsewhere.

At a time of global distress and uncertainty, demonstrating concern for the physical, emotional and psychological health of your staff is not just about complying with your legal requirements – it makes good business sense too.

Showing that you care for your employees will build trust, reinforce your commitment to them, and maintain engagement, morale and productivity. It will also help ensure you have a committed workforce once the current economic challenges and constraints of the pandemic are over.

COVID-19 to push growth trajectory of data centre industry, Data Economy

COVID-19 has changed the business landscape in all industries across the globe, and the data centre sector is no exception.

The data centre has emerged into the spotlight as the pandemic forces the increase of remote working and information from governments, causing the growth trajectory of the industry to scale up.

With data centre operators being established as key/ essential workers, data centre operators are facing a number of COVID-19 related challenges, including limiting routes for infection whilst providing continuity of service.

Taking a little trip down memory lane – pre-COVID-19 – the growth of cloud technology played a major part in the data centre sector’s success.

In 2018, global revenue from the wholesale and retail data centre colocation market amounted to around $38 billion, according to Statista; with industry revenues expected to increase to over $50 billion per year by 2023 – as an increasing share of global businesses adopts data collection and analysis into their strategy.

Ed Cooke, Founder of Conexus Law told Data Economy that the virus will not have too much of a negative impact on the data centre sector as its need becomes more prevalent.

“It is no secret that the use of social media, online videos, gaming and all other underling fundamentals to do with the Internet of Things (IoT) is all on track to boost the requirements for data, data processing and IT infrastructure,” he says when giving a general overview of the industry before the pandemic began.

“There were still great amounts of construction taking place in the tier one cities; France, London, Amsterdam and Paris and Dublin, and there has been growth occurring in other markets too – particularly in South America, the Nordics and in Africa, and quite a lot of expansion is happening in Asia.

He was right. In the last seven days, companies in the sector have still been announcing mergers and acquisitions as well as the beginning of a new data centre build in London by Netwise.

Despite all of this, Cooke says that there are some cracks that appear as there has been some constrain in the supply chain.

“There are very few main contractors out there who have expertise in building data centres securely, and they were over-reliant on an even smaller group of suppliers who would supply the equipment,” he explains.

“However, what is interesting about COVID-19 is that in many ways it will push the growth trajectory of the industry.

“People have had it demonstrated to them now that they can work remotely, and many companies have already had it demonstrated to them now that their business continuity plans are not what they thought they were.

“I suspect we will see an increase in the purchase of cloud technology and the purchase of IT infrastructure and backup systems.”

Cooke explains that he fears the supply chain may get even more constraint, as he predicts that businesses may be lost as a result of the virus.

“Many clients are now starting to think about what happens when construction starts again, there will be a real fight for resources both in terms of labour and spaces on the manufacturing lines of these equipment providers, the generator providers, the transformer providers.

“People will want to make sure that their project starts up again first. In the short term after COVID-19, it will be a bit of a battle.”

Cooke went on to explain that one of the other things that the industry is witnessing is the likes of big internet companies like the Microsofts of this world starting to take up the spaces that they had reserved in data centres.

COVID-19 effects on finances

Recently, US data centre power biz Vertiv cut its financial forecasts for the next quarter in response to the impact of the coronavirus outbreak on its supply lines.

HPE, Microsoft and Samsung have all warned that the virus is likely to affect their supply chains this year.

Facebook pressed the pause button on the construction of its Huntsville, Alabama data centre campus due to safety concerns over staff during the COVID-19 outbreak.

Cooke previously told Data Economy that the pipeline of new data centres is under threat as the supply of labour and parts have been paused by the international response to the COVID-19 pandemic.

All hope is not lost as companies like Tencent and CyrusOne amongst others have all pledged to donate money to combat the virus as well as offer support where it is needed.

Data centre businesses rally on markets fightback after governments around the world pour more than $1.5tr into economies.

Source: data-economy.com/light-at-the-end-of-the-tunnel-covid-19-to-push-growth-trajectory-of-data-centre-industry

Fact Sheet: Struggling to meet your contractual obligations? What are the issues and options?

Life and business has got a lot more difficult and complicated since the classification of COVID-19 as a pandemic.

As a result, all businesses have or will be looking at their financial and logistical obligations to third parties.

If you are struggling to meet any of those obligations, please consider this guidance to see if you can implement any of our suggestions.

Press Release: Conexus Law announces new team

Conexus Law, the specialist advisory firm that provides legal and commercial advice to clients who work in sectors where the built environment, technology, engineering and people converge, has announced a number of senior appointments that are joining founder, Ed Cooke.

Emma Cordiner specialises in Real Estate & Data Centre Leasing with over 15 years’ experience in the world of commercial real estate transactions, both in the UK and internationally. This includes acting for datacentre industry clients, advising during the negotiation and legal transaction phases of securing space in data centres to create global networks spanning multiple jurisdictions.

Husna Patel specialises in construction and engineering law with a strong legal background in transactional and advisory work. She has worked in-house at a global electrical equipment suppliers who frequently supply the technology and data centre sectors, and so has seen negotiations from both sides. Projects include commercial and residential property development, technology projects such as data centres, on- and off-shore wind farms, bio mass and bio fuel plants, and land remediation projects in the UK and internationally. She has particular expertise with engineering and international contracts, such as those based on FIDIC.

Marilyn Heward-Mills has over 20 years of employment law experience focusing on contentious and non-contentious matters. She started at the predecessor to WilmerHale in 1996 as a dual-qualified English and US lawyer. Marilyn is also a published fiction author and a qualified therapeutic counsellor.

Philip Brown has over 15 years’ experience as a lawyer working in the technology sector. His clients include data centres, telecommunications providers, software developers and platform providers and their customers. He has put cloud and software platforms into some of the biggest global brands and advised on telecommunications systems arrangements within the nuclear sector and consumer-facing technology providers.

Commenting on the new team Ed Cooke, founder at Conexus Law, said: “Conexus Law is founded on the belief that we can only deliver the best counsel if we have a strong understanding of the sectors’ challenges and the underlying technology and processes. Therefore, every member of the team has specific industry expertise and is a leader in their field. I am extremely proud of this amazing group of people and look forward to welcoming others as we continue to grow.”