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Q&A – Tenancy, rent & business rates

Question: I will struggle paying rent and rates in the foreseeable future. Can I suspend making payments? What is the risk that I shall forfeit the lease if I do not pay?

Answer: The only options open to gallery tenants in England are to negotiate a rent-free period, a temporary reduction of rent, a deferral of rent or a monthly payment of rent in advance rather than quarterly. 

Landlords are more likely to be open to negotiation if the tenant has leverage.  If the gallery is genuinely is financial difficulty and could be pushed into insolvency, the landlord might not want to take the risk of loss of rent, an insolvent tenant in possession and eventually, a vacant space that may well be difficult to rent for the foreseeable future.  The landlord might also be receptive to a threat to break or not renew the lease if either is allowed in the near future.

An early conversation between landlord and tenant can help both parties to agree a plan if the tenant is struggling to pay rent. This can include reaching a temporary agreement not to seek possession action for a period of time and instead accept a lower level of rent, or agree a plan to pay off arrears at a later date. Where a landlord does choose to serve notice seeking possession for rent arrears or has done so already, the notice period and any further action will be affected by legislation suspending possession claims (see below).

If a gallery is about to take space, it should ensure that rent payments are deferred by any period during which it cannot trade at the premises.

If the gallery can avail itself of a business interruption insurance policy, the policy should be reviewed.  Fixed costs such as rent may be covered by the policy.  Generally, business interruption policies in England only cover loss resulting from physical damage to premises and exclude the economic impact of pandemics.  However, that is not always the case.  There may be a clear exclusion for pandemics, there may be no exclusion at all, or the wording may be ambiguous.  Galleries should be prepared to see their claim rejected because insurers are likely to face an avalanche of claims and they may not be unable to honour all of them.  A claim under a business interruption policy must be made promptly, generally within 14 or 30 days of the event giving rise to the claim.  In doubt, a claim should be made and the gallery should seek the assistance of its broker to explore whether the policy does in fact cover fixed costs such as rent.

The Government has announced a 12 month ‘holiday’ from ‘business rates’  payable by retail businesses starting from 1 April 2020.  ‘Art galleries (where art is for sale/hire)’ qualify for the relief.   To benefit, the business must be ‘based in England’.   The total amount of relief available for each property for 2020/21 under this scheme is 100% of the bill.

Businesses are further protected from losing their premises if they fail to pay rent between now and the end of June. Under s. 82.1 of the Coronavirus Act 2020, a ‘right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period’.  A ‘relevant business tenancy’ means any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes.  Premises occupied by an art gallery qualify.  The relevant period started on 26 March 2020 and will end on 30 June 2020 unless extended. This does not mean that the rent ceases to be due.  This is simply a temporary protection.  Rent remains due and if a business is unable to pay it during this period, it will remain due and payable. 

In practice, the options available to the gallery include :

  • Paying rent one month at a time instead of quarterly;
  • Rental payments in arrears, rather than in advance;
  • A rent-free period for 3–6 months. If the landlord objects to a rent-free period, the tenant could suggest that those rental payments are spread over the period of 3-6 months following the re-opening of the premises;
  • A reduction in rent by, say, 50%: the landlord and the tenant “share the pain”;
  • Drawing on an existing rent deposit instead of collecting rent ;
  • The rent is permanently or temporarily converted to a turnover-only basis.

Galleries who pay service charge to the landlord should look for a significant reduction of the service charge, as many services will not be provided until the building where the gallery is located, reopens.

Whatever is agreed should be recorded in writing.