Commercial property rent during coronavirus

The Covid-19 pandemic has had a significant impact on businesses and, therefore, a knock-on effect on commercial landlords and tenants.  With many businesses having been unable to trade until now and some still closed indefinitely, the government has imposed restrictions on a landlord’s ability to take back its premises on the grounds of non-payment of rent alone.  This however, has not prevented rent and other sums due under a lease from accruing. As a result, many landlords and tenants have agreed arrangements in respect of debt obligations, such as deferring rent payments to a later date, temporary rent free periods, discounted rents and payments of monthly or weekly rents rather than quarterly rents.  As cash flow is tight during these times, it is essential that both landlords and tenants give careful consideration to any agreement reached concerning payment of rent.

The Restrictions

Forfeiture

Forfeiture describes a landlord’s right to re-enter the premises (subject to a forfeiture clause being included in the lease), without notice, and take back possession of the premises, and so bringing the lease to an end.

With effect from 26^th March 2020 business tenants who cannot pay their rent have been protected from forfeiture for non-payment of rent as a landlord’s ability to take forfeiture action on this ground has been suspended pursuant to the Coronavirus Act 2020 (“the Act”).  The Act defines “Rent” broadly and most commercial leases will include provision that any sum of money recoverable from the tenant by the landlord pursuant to the terms of the lease is “recoverable as rent” or “payable as rent”. So “non-payment of rent” under the Act does not apply to just “the rent”; it includes non-payment of service charges, insurance premiums and interest and the Act also applies to any arrears that accrued before the relevant period and which have nothing to do with COVID-19 or the resulting business closures.

At present the right of forfeiture for non-payment of rent has been suspended until 30^th June 2020 but for some time we have suspected that this may be extended. It has recently been reported that a number of trade bodies, including UKHospitality and the British Independent Retailers’ Association, have called for the government to extend this forfeiture moratorium as a matter of urgency given that the June quarter date is nearly upon us. They have suggested that unless the moratorium is extended until at least October, a number of businesses that have yet to re-open will suffer dire consequences and, ultimately, fail.

Commercial Rent Arrears Recovery (CRAR)

The CRAR procedure permits a landlord to engage an enforcement agent (also known as a bailiff) to enter the premises, take possession of the tenant’s goods and sell them in order to recover unpaid rent.  In light of government measures to “protect the high street” and businesses generally, CRAR now cannot be used unless the landlord is owed 90 days or more of unpaid rent. Landlords also cannot use CRAR if a tenant pays some of the rent arrears, so it is easy to see how a tenant can defeat a Landlord’s right to use CRAR at present. This restriction on the use of CRAR applies where notice of enforcement has been given after 25^th April 2020 but before 30^th June 2020.  Again, we are waiting to see if the date of 30^th June 2020 will be extended.

Statutory Demands and Winding-Up Petitions

On 23^rd April 2020, the government temporarily banned creditors (including commercial property landlords where rent is unpaid) from using statutory demands between 1^st March 2020 and 30^th June 2020 and winding-up petitions presented between 27^th April 2020 and 30^th June 2020 where the debtor company cannot pay due to COVID-19.  Under these restrictions, any winding-up petition asserting that a company cannot pay its debts must be reviewed by the court to ascertain why.  The court will not allow petitions to be presented or any winding-up orders to be made where non-payment is as a result of COVID-19.

The government announced on 25^th April 2020 that statutory demands made between 1^st March 2020 and 30^th June 2020 will not be able to form the basis of a petition and winding-up petitions that have been presented between 27^th April 2020 and 30^th June 2020 will be of no effect.

It is anticipated that these restrictions will be confirmed in the Corporate Insolvency and Governance Bill.

It is not yet known what the expression “inability to pay as a result of Covid-19” will require a tenant to prove.  It could mean that a tenant has to demonstrate evidence of its solvency at the time or only that it has had to cease to trade during lockdown.

Options for a Landlord

The forfeiture moratorium applies only to forfeiture for non-payment of rent. A landlord can still forfeit a lease for other breaches of the lease, although this can be time-consuming and expensive and the tenant will still have the option to apply to a court for relief from forfeiture. Dealing with applications for relief of forfeiture can be expensive for the landlord and the outcome is often uncertain.

A landlord can still issue debt proceedings in court to recover unpaid rent.  It can also apply to the court for an appointment of an administrator if the tenant is a company.  However, landlords may not be desirous of doing this as it more costly than issuing a statutory demand and will take more time.

Landlords can still draw down on any rent deposits they hold for non payment of rent but if the tenant is in administration a landlord may wish to retain this money for other amounts due, such as dilapidations.

Subject to compliance with any relevant statutory procedures, landlords may still bring an action against a guarantor as, so far, there has been no restriction placed on this means of recourse for non-payment of rent.

Practically, landlords may be unlikely to want to take back possession of the premises by way of forfeiture and may well prefer to come to an agreement with their tenant as to the payment of rent. Certainly the message from the government during this time has been that landlords and tenants are encouraged to co-operate. Landlords are urged to “give their tenants the breathing space needed” but likewise tenants are called upon to pay their rent if they possibly can.

Agreements with Tenants concerning Rent Deferral

In the spirit of co-operation urged by the government, more landlords and tenants are coming to an agreement to record temporary concessions given by the landlord relating to payment of rent

It is essential that landlords are aware of the vital importance that any such agreements must be clearly documented. Any written agreement should ensure that the landlord does not alter or waive its other rights in the lease, such as its right to forfeit the lease. If there is a guarantor or surety, it is also essential that the document recording the agreement for rent deferral is agreed by the guarantor or surety, as any variation could release the obligation of a guarantor/surety if he or she is not a party to the agreement for rent deferral.

The Future

In the retail sector there is pressure on the government to introduce a 9 month rent free period for leisure industries as well as loan and interest postponements for landlords.

In the meantime, however, landlords and tenants are encouraged to cooperate with each other to reach rent concessions or rent holidays.  For future renewals of leases, it is also likely that tenants, when agreeing new leases, will wish to take shorter leases and possibly include a clause known as a “Covid” clause providing that rents will not be payable in the event of a future lockdown.  Unsurprisingly this is likely to be resisted by the Landlord.  Careful consideration will also be needed of the compliance with health and safety provisions in the lease in so far as they concern the installation of equipment for social distancing.

It remains to be seen what will be the new “normal” and as such, any landlord or tenant negotiating any agreement regarding rent payment should proceed carefully.  If you require advice please do not hesitate to contact the Commercial Property Department at Colemans via Dara Galic or Kate Williams by telephoning 01628 631051 or by email to commercialproperty@colemans.co.uk.

Categorised in: Commercial Property

This post was written by Colemans Solicitors LLP