Walk down the local High Street and the profound effect of COVID-19 on businesses is obvious. Many commercial units are lying locked and empty.
Empty units have financial implications for commercial landlords and tenants.
With both landlords and tenants feeling the pinch after a year of restrictions, it is important for landlords and tenants to plan strategically for maximising outcomes from empty units. Doing so will ensure that their interests are protected, even during this period of market uncertainty.
If you are a commercial tenant
Tenants need to be aware of their potential liability for insurance and security. They also need to consider mitigating their liability for repairs or dilapidations at expiry.
Duty to notify insurers
Most leases will require tenants to notify their insurer and the landlord if premises are lying empty. Tenants should act quickly to alert insurers. Failure to do so could impact or even invalidate insurance cover.
Duty to secure the premises
Tenants should also consider what obligations they owe to secure the premises from intruders. This may include securing access points like doors or windows and making sure that security devices are in working order. The exact measures to be taken will depend on the type of building and the lease agreement between parties. But it is likely that additional security will be required.
Turning off utilities
Consider whether you should be turning off water and electricity. To do so may reduce the risk of fire or burst pipes but be careful that by turning of the electricity, you do not stop the burglar or fire alarms from operating. And if your heating system depends on water, you may need to leave it on to keep the premises heated.
Dealing with dilapidations
Every lease has a repairing obligation and almost all tenants will be required to keep the premises repaired to a defined standard, such as good condition and repair. Empty premises are still likely to need regular inspection and repair to avoid breach of the repairing obligation and the financial liability which follows from breach.
Frozen water pipes, electrical fires and even pest control all present hazards when premises are left unattended.
Given the current climate, landlords are likely to pay close attention to the condition of empty premises. They may enforce breaches of the repairing obligation ahead of expiry. Alternatively, they may choose to let leases run on empty lets before pursuing larger claims on lease expiry.
Neglecting repairs now could leave the tenant exposed to costly dilapidation claims later.
Tenants can mitigate the risks by ensuring that regular maintenance is carried out, especially on M&E items such as air conditioning and refrigeration which, if left idle and unused, could fall into significant disrepair.
If you are a landlord
From a landlord's perspective, it could be tempting to put off pursuing a tenant for breaching its repairing obligations. By doing so, landlords might be hopeful of storing up a large claim for dilapidations at expiry.
Given the current climate with its increased difficulties in securing a new let for empty premises, this may seem an attractive option.
But it's important for landlords to consider their options before choosing this strategy. This includes thinking about the length of the lease and current scale of dilapidations. Most importantly, comparisons need to be made between the likely size of the claim now and at expiry; and between the chances of recovering cash from a tenant now as opposed to at the end of the lease.
With the pandemic ongoing, it is not clear when "normal trading" will resume – can tenants afford to go the distance or is it better to make a claim now?
Being aware of their options for re-letting, whilst doing diligence on the tenant's ability to pay now and at lease expiry, will help a landlord decide whether to 'cash-in' on repairs now or play the long-game.