The world of commercial leasing as we have known it, is changing. What were previously unthinkable scenarios are not part and parcel of the COVID-19 world in which we are living.
Landlords are facing rent abatements demands; rent holidays, rent reductions and/or insolvency of what were previously seen as "Blue Chip" commercial Tenants. The expectation is that a commercial tenant will be in a strong financial position to meet rents and rates charges and that they will keep the premises in a good and safe condition. It is nobody's fault, but these normal expectations are not the new reality. Risk and potential for default is the new norm.
Commercial tenants, particularly in the worst hit, leisure and retail sectors are facing reduced, or non-existent footfall, and corresponding massive drops in turnover. Commercial leases as we know them carry fundamental terms of certainty of tenure, fixed rent usually payable quarterly in advance, which is subject to rent review after an extended period of five plus years. Tenants also face the risk of significant dilapidations covenants, and are often not permitted to assign or alienate to a third party without a landlords "reasonable" consent. Reasonableness often being assessed against the financial viability of the proposed assignee and dependent upon the review of a number (usually three) of previous years trading. The tenant also expects to be given quiet enjoyment for the full term.
Despite the massive impact of COVID-19 on the landlord/ tenant relationship and the strong commercial market enjoyed in Irish cities (particularly Dublin) rents have not collapsed. There is evidence of collaboration, particularly where the tenant covenant is strong and where there is an international dimension to the relationship. The Irish landlord can frequently be divided into groups identified as either domestic/International institutional landlords or the domestic entrepreneur landlord. The ability for compromise and collaboration is heightened where a tenant seeks to alter its immediate lease terms to meet trading difficulties, where the landlord is an institutional entity and can weather the storm. Decisions can be made on a wider book value, rather than on a profit and loss cash value.
In other words the Institutional Landlord has a greater ability to assess the future viability of the tenant and it's medium to long-term ability to recover and repay any arrears. Whereas the entrepreneurial landlord has a potentially more urgent need to immediate repayment of arrears. Where this arises the landlord then has to assess if the tenant is an insolvency risk and if it is better to have a legal battle and vacant possession or reduced terms and ongoing occupancy.
Landlord and tenant disputes are usually technical in nature and even if the issue on its face is to do with unpaid rent and/or service charges, it is possible to find that lease terms only provide for a confidential arbitration process and no ability for the landlord to issue debt recovery and/or ejectment proceedings.
In the era of COVID-19 disputes, it is more likely to see tenants invoking provisions under the lease to delay repayment, including seeking to refer any dispute to Arbitration and not the Courts.
Alternatively, if the tenant is a special purpose vehicle and there is no wider parent company guarantee the tenant may be more prepared, than heretofore to allow the Landlord retake possession and not challenge debt proceedings if the tenant has no other assets.
The other side of the coin is where the tenant (with a wider exposure and other assets or a Guarantor) has sought rent abatement/reductions and been refused, and simply sought to take matters into their own hands and pay what "they can afford", then they risk facing winding up proceedings, which they can ill afford.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
