21 April 2020

Art in the time of Coronavirus: Landlord and tenant considerations for the art market

According to the British Art Market Federation, the UK arts and antiques market is comprised of nearly 8,000 businesses, providing direct employment for over 41,000 people. It is the third largest in the world with over a 20% global share and, therefore, a significant sector in the UK economy. However, it is a sector that relies heavily on the physical presence of persons to transact and operate, and one that will clearly feel the effects of the COVID-19 pandemic.

At the time of writing, it is impossible to predict how and when the arts market will return to anything verging on normality. Reports suggest that social distancing will continue indefinitely even after the general UK lockdown has been lifted.

Despite the lockdown, and the uncertain outlook for the future, the landlord and tenant relationship for galleries, auction houses and other arts businesses continues. Landlords and tenants alike should both be wary of their ongoing obligations, and notably from a tenant's perspective, the requirement to pay rent.

As we have outlined here, leases do not as a matter of course contain force majeure clauses. As such, gallery and auction house tenants, along with their guarantors, will remain bound by their obligations even though their premises cannot be occupied. Furthermore, assuming that the usual lease drafting applies, it is only in the unlikely event that Covid-19 is classed as an insured risk under the lease that rent would be suspended and claimed for through the landlord's loss of rent insurance cover.

Since 26 March, the Coronavirus Act 2020 has been in force. In order to protect businesses during this period, the Government has legislated a moratorium, expiring 30 June 2020, on forfeiture of nearly all commercial tenancies for non-payment of rent (tenancies of under six months may not be covered by this provision). 'Rent' is defined in the legislation as any sum a tenant is liable to pay under a business tenancy. The Ministry of Housing, Communities and Local Government has confirmed that this includes sums 'reserved as rent' under a lease, which typically includes items such as insurance rent and service charges. It should be noted however that landlords can enforce non-payment by other means if necessary (including Commercial Rent Arrears Recovery (CRAR), winding up proceedings or a debt action). For a gallery tenant protected by (i.e. not contracted out of) the statutory rights of lease renewal for business tenancies under the Landlord and Tenant Act 1954, the Coronavirus Act also provides that a landlord is unable to rely on the 'persistent delay in paying rent' during this moratorium period as a ground for opposing the grant of a new tenancy.

Whilst these provisions have no doubt eased a gallery's fears if payment is proving difficult during this time, it is crucial for all arts businesses to remember that the sums due are still owing.

Ultimately, landlords and tenants are both affected by the current situation and it is in the interests of all parties to come out of the pandemic unscathed. With this in mind, the best solution is to come to an arrangement which works for both and then to formally document that arrangement. This could include rent deferment, paying rent by monthly instalments or agreeing to take rent owing out of any rent deposit held. A further solution might be to temporarily convert the rent to a turnover-based rent, which would be a fairer reflection of a gallery's ability to generate revenue through virtual viewings and online sales. However, the terms of any agreement must be carefully considered.

For landlords of galleries and other arts businesses, it is vitally important to obtain the consent of any guarantor under the lease, as a material variation made to the lease without the guarantor's consent could release the guarantor as security for the tenant's obligations. Landlords should also be mindful in the current climate of the requirement to serve, within six months of any rent or fixed sums falling due under a lease, Landlord and Tenant (Covenants) Act 1995 section 17 notices on former tenants and guarantors of existing leases, if it looks unlikely that the current tenant is going to pay.

With expertise in acting for occupiers and landlords, we are uniquely placed to assist in this area. Please get in touch with our Heritage Property and Art team or Commercial Real Estate and Property Litigation teams with any concerns you may have about protecting your business.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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