The government has relaxed planning rules to support businesses in the hospitality sector during the Covid-19 outbreak. Tenants now have greater flexibility, but must watch out for provisions in their leases.
The pithily-titled Town and Country Planning (General Permitted Development) (Coronavirus) (England) (Amendment) Order 2020 (the Order) came into force on 25 March 2020. It grants restaurants, cafés and drinking establishments a temporary right to change the planning use.
In normal times, a pub or restaurant wishing to add hot food takeaways would need to apply for planning permission first. The Order now permits the provision of hot food takeaways under Class A5, and any hot or cold pre-prepared food for takeaway or delivery. The Order is in force from 24 March 2020 until 23 March 2021 and can be implemented by notifying the local planning authority.
These measures appear to be a lifeline for struggling restaurant and pub operators whose businesses have come to a standstill due to the government’s lockdown measures. But these changes to planning law are only half the story. Before making any changes, tenants must check their leases carefully, as these may restrict changes of use.
Risks to tenants
The Order changes town and country planning law, but does not relieve tenants of their contractual obligations. If a tenant changes use in a manner allowed by the Order, but which happens to be prohibited under the terms of its lease, then the landlord still has the right to serve a section 146 notice threatening forfeiture and, potentially, to recover possession of the premises.
The newly passed Coronavirus Act 2020 prevents forfeiture of commercial leases until 30 June this year. But that moratorium applies only to non-payment of rent or other monetary sums, so will not assist a tenant in breach of a use covenant.
It is fair to assume that most landlords will wish to help their tenants survive this challenging period and will not wish to forfeit leases, not least since there is unlikely to be a long queue of tenants bidding to take new leases in the current climate. Nonetheless, well-advised tenants should check their leases for any restrictions on change of use.
Lease terms
User restrictions can vary in their strictness:
- Absolute covenant – the tenant is not entitled to apply for a change of use. In the absence of a sympathetic landlord agreeing a variation (temporary or permanent), the tenant is stuck with the stipulated use.
- Qualified covenant – no change of use without landlord’s consent, but the landlord does not have to act reasonably.
- Fully qualified covenant – no change of use without landlord’s consent, not to be unreasonably withheld.
Fully qualified covenants are better for the tenant but can give rise to difficult questions. In the current climate, would it be reasonable for a landlord to block a high-class restaurant offering a takeaway service in accordance with the Order? The new use may be inappropriate to premises in an upmarket location, but would be only temporary and could provide a lifeline to a struggling business.
In the recent case of Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd [2019] UKSC 47; [2019] EGLR 52, the Supreme Court advocated a “down-to-earth factual analysis of the economic consequences to the landlord” to ascertain whether refusal of consent would be reasonable. Conversely the RICS Code for Leasing Business Premises 2020 says covenants against change of use “should be no more restrictive than necessary to protect the value of the premises and any neighbouring premises of the landlord.”
The government has understandably made it clear that it expects landlords and tenants to work together in these exceptional circumstances. It is too early to say whether the courts will adopt a similar approach in assessing whether a landlord’s conduct was reasonable in the context of the pandemic.
Risks to landlords
Assuming that landlords will be largely open (in the short term at least) to facilitating measures that assist their tenants and maximise their chances of recouping rent, they should take care to avoid unintended consequences. Concessions must be documented carefully to make it clear what is being agreed. Failure to do so could result in:
- A tenant claiming that the lease has been varied permanently rather than temporarily.
- A guarantor arguing that the concession has the unexpected effect of releasing the guarantor from all liability under the principle in Holme v Brunskill (1878) 3 QBD 495. For a modern example of how a pro-tenant amendment can have this bizarre result, see Howard de Walden Estates Ltd v Pasta Place Ltd and others [1995] 1 EGLR 79. The simple way to avoid this is to insist on the guarantor signing any concession documentation (deed of variation or side letter).
- In the absence of an express disregard, the additional uses being taken into account on rent review in the context of the subject premises and/or the landlord’s wider estate. Could use as a hot food takeaway depress the premises’ investment value?
The relaxation of planning law is welcome, but is not the end of the matter. Landlords and tenants need to consider the long-term implications of changing their user provisions, as well as the short term issues currently faced. Failure to do so could lead to significant unintended consequences.
Mark Reading and Victoria Dacie-Lombardo are managing associates in the real estate disputes team at Mishcon de Reya LLP
