2020-05-05
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Coronavirus: Impact on commercial rents - advice for landlords

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Posted by David Slade on 24 April 2020

David Slade Partner - Head of Real Estate

Requests from commercial tenants for rental holidays in the light of a drop in business caused by the coronavirus pandemic have become commonplace.  Analysis indicates that overall rent collection for the March quarter fell by over 25% in the UK which will undoubtedly have an impact on commercial landlords during the coronavirus crisis.

Forfeiture moratorium

In March 2020, the Government announced extra protection for business tenants by placing a temporary restriction on commercial landlords’ ability to enforce re-entry or forfeiture for non-payment for at least three months, so that those who cannot pay their rent because of cashflow difficulties related to coronavirus will be protected from eviction.  These measures are contained within Section 82 of the Coronavirus Act 2020 (“the Act”) (passed on 25 March 2020) and will mean no business tenant will be forced out of its premises if it misses a rent or other lease payment prior to 30 June 2020.   The Act gives the Government power make future extensions of the moratorium beyond 30 June.

In any event most landlords, in the current uncertain market, would not wish to bring their tenants’ leases to an end by re-entry or forfeiture, regardless of the Act.

Pursuant to Section 82(2) of the Act, no conduct by or on behalf of the landlord during the three month moratorium will be regarded as waiving the right to forfeit for non-payment of rent, other than an express waiver in writing.  The landlord’s actions will therefore will not prejudice it from exercising a right to forfeit in the future, when the moratorium is over.

Insolvency proceedings moratorium

Normally landlords are entitled to serve a statutory demand for non-payment of rent after which, if it remains unpaid for a period of 21 days, the landlord can issue winding up proceedings. The tenant can apply for an injunction to restrain the presentation of a winding-up petition. Due to the urgent nature of such application this can be an extremely expensive application to make. The landlord also has the option of bypassing service of the statutory demand and proceeding straight to winding-up proceedings.

However, on 23 April 2020 the Government announced that it is to ban temporarily the use of statutory demands and winding up orders for non-payment of rent.  The legislation has not, as at 24 April, yet been passed but it is clear from the Government’s statement that the moratorium will be in force until 30 June 2020 initially, with the same possibility for future statutory extensions as are given to the forfeiture moratorium.

Commercial Rent Arrears Recovery (CRAR)

Normally CRAR permits a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them to cover the debt. The process is quite complex and necessitates the landlord serving notices on the tenant.  CRAR may only be used in respect of principal rent, so cannot be used to recover other sums due under the lease such as service charges and insurance rent. 

The Government’s 23 April 2020 missive, however, stated that it would be laying secondary legislation to provide tenants with more breathing space to pay rent by preventing landlords using CRAR unless they are owed 90 days of unpaid rent.  This legislation came into force on 25 April.  The 90 day rent threshold is temporary and will last for the same period as the statutory forfeiture moratorium discussed above.

There are remaining rights and remedies which enable landlords still to pursue other options for non-payment of rent or other breaches of tenant covenants.  The forfeiture moratorium and the CRAR changes do not extinguish a tenant’s rental or other liabilities under the lease, and it is not expected that the legislative changes relating to insolvency proceedings will remove those liabilities either.  It is open to landlords, then, to agree a temporary payment holiday with the tenant, safe in the knowledge that the missed payments will remain due.  Landlords and tenants may also agree lease re-gears with mutual benefits to each, about which we have published a separate bulletin.

What other rights and remedies remain available?

 

Debt recovery proceedings

The landlord can issue court proceedings for non-payment of rent as a simple breach of contract claim.   If the claim is for less than £10,000 then the landlord will only be entitled to reclaim a fixed amount of legal costs and interest but, above £10,000, the landlord will be entitled to reclaim reasonable legal costs and interest.

Rent deposit

A landlord may be able to draw down on a rent deposit if one was entered into when the lease was granted. The ability to draw down will depend on the terms of the deed, which may impose certain limitations, but the landlord is likely to be in a position to withdraw funds in the event of tenant default

(i.e. non-payment of rent) and require the tenant to top up the deposit following withdrawal.

Side letter as a “lever”

If a tenant has personal concessions in a side letter, it is possible – if the side letter is worded accordingly - that these may be capable of being withdrawn if the tenant is in breach of the lease, such as if it is in rent arrears.

Social distancing will be likely to prejudice the efficacy of the debt recovery proceedings remedy, at least while lockdown remains in place.

Practical options

The coronavirus outbreak inevitably has significant ramifications for commercial landlords and their income streams.   The changes announced on 23 April are, according to Business Secretary Alok Sharma, designed to prevent a “minority of landlords using aggressive tactics to collect their rents … while the COVID-19 emergency continues.”  It is important to stress that the existing and impending legislation discussed above does not suspend or extinguish lease liability for unpaid rent, only some of the remedies available to the landlord for non-payment.  We would therefore encourage, where possible, an open line of dialogue with tenants in difficulty - to preserve commercial relationship and reputation.

About the author

David Slade

Partner - Head of Real Estate

David heads our commercial property team. He specialises in investment property sales and purchases.

David Slade

David heads our commercial property team. He specialises in investment property sales and purchases.

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