The Scottish commercial letting sector will be familiar with the rent and other concessions granted by landlords during the Covid pandemic, with the aim of working with tenant occupiers and retailers to navigate the impact of the pandemic. Whilst common during that period, here we consider if pandemic clauses are still relevant and, if so, if they are evolving from those agreed during Covid.

Whilst facemasks and social distancing may be over, the effects of the Covid pandemic are still being felt today in the way that we work and interact. Recent ONS data shows that around 21% of workers operate both from home and from their workplace, whilst 15% work exclusively from home. Pre-Covid those figures were as low as 4 or 5%.

As we are all aware, this is having a knock-on effect on occupiers as less footfall into offices during the week results in lower income for retailers who would previously have depended upon that regular traffic. Despite this the market appears to have moved on from the Covid pandemic and as a result the protections previously afforded to tenants during the pandemic have largely eased off.

Covid protections

During the pandemic in Scotland tenants benefited from statutory protection afforded by the Coronavirus (Scotland) Act 2020. The Act protected commercial tenants from landlords terminating leases for non-payment of rent by extending the pre-irritancy (Scottish forfeiture) notice period from 14 days to 14 weeks. These protections however expired on 29 March 2022.

Otherwise tenants had to rely upon the discretion of their landlord if they wanted to benefit from further Covid concessions. The market moved to providing that protection and it became relatively standard in commercial leases for tenants to be afforded a rent-free period, a period of reduced rent, a rent deferment or a mixture of all such concessions during government enforced closures.

The driving factor for landlords was that they were keen to keep tenants and leases in place, even if that meant a temporary reduction in income. This minimised landlords' exposure to service charge voids and rates and so it suited both parties, to an extent, for the tenant to be granted such concessions during the pandemic.

The current landscape

The landscape has now changed and tenants are no longer hindered by Covid laws preventing them from trading as they would like. As a result Covid concessions are (generally speaking) far less prevalent in commercial leases than they were between 2020 and 2022. Interestingly, despite tenants also having lost the statutory protections afforded to them during the pandemic, we are not seeing a drive to retain those provisions (such as the extended pre-irritancy period) in leases – the market has simply reverted back to the pre-Covid provisions.

Landlords may still offer such concessions to established tenants with strong covenants who have greater bargaining power during the negotiation of heads of terms. However where previously a tenant may have been successful in obtaining a pandemic concession even if not agreed at heads of terms, now landlords appear less sympathetic to this and are pushing back on such late requests: the market is now moving to pandemic concessions being a purely commercial point and, therefore, one expected to be raised during heads of terms negotiations. General pandemic protection clauses have not become standard lease clauses.

We have seen the market move in terms of the content of pandemic clauses. Where concessions are accepted, these tend to reduce or defer the rent during any pandemic or epidemic (rather than just Covid) and are more strictly tied to government enforced measures. As a result, whereas during the pandemic such concession clauses were often bespoke to each tenant, we are now seeing a more market standard pandemic clause emerge.

Looking forwards

It's difficult to predict where the market will move to, but the market does seem to be accepting that Covid was a rare event and that the likelihood of another arising is perhaps unlikely, or if it did then there may be a different approach by governments towards social distancing and closing shops. That is reflected in the decrease in prevalence of pandemic clauses. It perhaps also reflects that governments did legislate to protect occupiers, and the market may be assuming they would do so in the future if needed. That in itself may be resulting in pandemic clauses being considered of lower importance.

Contributors

Michael McQuade

Associate

Elizabeth Ward

Legal Director