Coronavirus and commercial property: service charges

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If you are a tenant operating under a commercial lease, particularly in the retail and leisure sector, it’s advisable to check regularly with your landlord about their plans to review their service charge expenditure, in light of the current lockdown situation.

Service charges are typically planned a year ahead, charged quarterly in advance and then reconciled at the end of the service charge year. While we are in lockdown, only essential retailers are permitted to open, so the costs being incurred by landlords in operating their centres should be significantly reduced.

Leases usually allow for landlords to increase service charges in the event of incurring exceptional costs, but not for a reduction during the year where expenditure is reduced. Technically, this means that landlords can continue to levy the service charge at the estimated rates set out at the start of the service charge year.

Whilst it’s hoped that landlords will realise that it’s unreasonable to continue to collect the estimated service charges in full, you should not rely on this assumption. Therefore, we suggest that you take positive steps to open a dialogue with landlords to minimise your outlay at this challenging time. In fact, the Property Manager’s Association issued an open letter to landlords earlier this week recommending this approach. You may find it useful to refer to this and possibly refer to it in any relevant correspondence with your landlord.

Suspension of rights of forfeiture for non-payment of rent

Among the provisions of the Coronavirus Act which came into force on 25 March, Section 82 which bans forfeiture for non-payment of rent (but not any other breach) will be of particular interest to commercial tenants. In this context, “rent” includes any sums payable under the lease and, as such, would catch service charges. Tenants should note that the ban on forfeiture does not affect the liability to pay rent, only the remedy of forfeiture, so other remedies for non-payment of rent (including service charges), such as CRAR and the use of statutory demands etc still apply. The Act therefore provides some protection for commercial tenants in dealing with their landlord in the context of the lockdown, but does not absolve tenants of their responsibilities under the lease.

Frustration and keep open clauses

Tenants unable to occupy premises are highly unlikely to find solace in the doctrine of frustration in relation to their lease obligations. Frustration is a high bar – there are no reported cases in England where this has been successfully argued, with the additional obstacle that the inability to occupy is only temporary. As for ‘keep open’ obligations, most commercial leases require the tenant to comply with statute, which would include the government’s official guidance and directions to close premises, so compliance with a keep open clause would put the tenant in breach of the lease. Even without the current extreme circumstances, Courts in England & Wales rarely order specific performance of such covenants and although, in theory, a landlord could claim damages for breach, it would need to prove it has suffered loss.