COVID-19 and the impact on commercial landlords

There has been much in the news recently about the support available from the Government for businesses in an attempt to save the high street and the economy, but little has been said about the effect on commercial landlords. Jenny Colvin in our Commercial Property team answers some of the most frequently asked questions for you.

My tenant hasn’t paid their rent. What can I do?

From 26 March 2020, the ability to forfeit a commercial lease for non-payment of the rent was suspended by the Government following the passing of the Coronavirus Act 2020. You cannot therefore take the usual steps to evict your tenant at present.  In December, this was extended until 31 March 2021, and in March 2021, this was extended once more until the end of June 2021. It was recently announced that this moratorium will now extend to 25 March 2022. Therefore, from 26 March 2022, unless the Government guidance changes further, you will be able to forfeit the lease and recover the property from this point. Consider, though, the merits of doing so beforehand as you will potentially be left with an empty unit which could be difficult to fill in the current climate and you may be liable for any empty premises business rates.

Forfeiture is not your only remedy.  Previously, landlords could also make the tenant insolvent.  The Government is further restricting the issue of statutory demands and winding up petitions against a tenant company for a further 3 months from 1 July 2021 where the tenant is unable to pay its debts due to the impact of Coronavirus.  This would only apply to commercial tenants.

For rental payments (rather than service charge or insurance) you can also utilise the CRAR (commercial rent arrears recovery) method of seizing goods to the value of the debt owed. The same legislation has, however, further restricted the landlords’ ability to exercise CRAR as a means of recovery of goods to the sum of the tenant’s debt. CRAR can only be used for arrears of rent and the extension now means that the minimum number of days’ outstanding rent required for CRAR to be exercised will be 554 days from 1 March 2020 and now extended to 25 March 2022.

Your only real method of enforcement at present is a debt claim for the arrears, which will involve taking the tenant to court, and how you do this will be dependent on the level of the arrears. This is currently still lawful but you should consider the merit of court proceedings as it can be costly to initiate and drawn out, given the volume of claims likely to be made in light of the latest extension.  There may also be issues of enforcement against company tenants, although individual tenants may be at more risk of enforcement.

The new legislation recently announced is said to contain a ‘ring fencing’ provision for arrears incurred during the COVID lockdown period. This will separate this debt from the rest of the lease, and landlords will be expected to make allowances for this debt and share the financial burden of COVID with their tenants..

My tenant has asked if they can pay a reduced rent during the shut down. Should I agree?

You can, the advantage being that you would still have some rent coming in, and a chance that your tenant will recover enough to survive this difficult period. It is very important though that you record any such rent concession agreement in writing with your tenant to avoid it later being used to argue that rent has been varied for the remainder of the term.

The latest change in legislation announced is suggested to contain assistance to help landlords and tenants come to an arrangement on the arrears, which will be binding on the parties and will referred to a private arbitrator in the absence of an agreement. It would therefore be prudent to try and come to an agreement on a payment plan to clear the arrears at a level you can both manage.

However, with most businesses outside of the hospitality sector now open, tenants are being asked to pay rent from the point that their respective restrictions have been released. It will take some time for many tenant businesses to recover though.

My tenant is a big company and I know they can afford to pay. Can I make them?

Unfortunately, the moratorium on forfeiture and other arrears recovery methods are not means tested. It therefore does not matter whether your tenant has the money or not. If they refuse to pay, there is little you can do until after 25 March 2022. Please bear in mind though that this is not a rent free period – the rent is still due for the unpaid period and should be paid by the tenant as soon as possible, otherwise you will be able to consider taking the aforementioned actions against them from 26 March 2022 or issue debt proceedings straight away.

However, the new legislation that is due to be introduced by the Government is said to do more to protect landlords by making it clear that those that can pay rent, should, as soon as their businesses are permitted to open.

My tenant’s arrears have nothing to do with coronavirus. Can I kick them out?

No. The moratorium extends to all business tenancies, with exceptions for tenancies at will, licences to occupy, and short term tenancies of less than 6 months, regardless of whether the arrears are directly attributable to the Coronavirus or not. The courts will consider on a case by case basis any winding up orders presented after 1 October 2021 and will consider whether the debt is due to Coronavirus or not as part of the process.

However, the new legislation indicates that whilst the moratorium applies to all business tenancies, the new measures will only cover those impacted by closures due to COVID. This means that any debt incurred before March 2020 and after the date that the relevant sector’s restrictions are lifted will be actionable by landlords from that point.

The tenant is still paying the rent but they are in breach of other covenants in the lease. Can I do anything about this?

Yes. The Coronavirus Act 2020 only covers rent arrears. Other breaches of covenant, such as carrying out unauthorised alterations or failing to keep the property in repair, may be dealt with in the usual way by serving a s146 notice and requiring the breach to be rectified, and applying for a court order to forfeit the lease if this is not done. This is a complex legal process though, and proper advice should be sought. You can also sue for damages to recover your losses from the breach as mentioned above. The new legislation is not clear yet on whether the restriction on other enforcement measures only apply to rent, or will also apply to service charge and other payments due under the lease. CRAR can only be used for rent arrears in any event.

My tenant says they still can’t pay even once lockdown is lifted. Do I have to help them?

Yes and no. The latest legislation unveiled by the Government suggests that you do need to work with your tenants to achieve a solution that works for you both on any arrears incurred as a result of COVID restrictions and lockdowns, however once the tenant’s sector’s lockdown restrictions are released they will then be expected to pay going forwards. The tenant has signed a contract and this contract requires them to meet the terms of the lease for the duration of it, but the new legislation separates out any rent arrears incurred from 1 March 2020 until the tenant is permitted to reopen from the remainder of the lease covenants. The events surrounding Coronavirus do not constitute a frustration of the lease and these extenuating circumstances do not otherwise change the contract. However, whilst recovering the property may be possible after 26 March 2022, with peaceful re-entry as an alternative to court proceedings, going to court or taking legal action is likely to be expensive for all involved, and will take some time, due to an expected backlog and high demand for the courts.

What else are the Government doing?

In addition to the statutory measures outlined above, the Government has published the Code of Practice for commercial property landlords and tenants for use during the COVID-19 pandemic. It has been prepared by industry professionals and is designed to give guidance to both sides on how to deal with commercial property issues in the current climate.

Compliance with the Code is not mandatory and its provisions are not legally enforceable, however, the Code is designed to apply to all commercial leases held by businesses which have been "seriously negatively impacted by the Covid-19 crisis" until 25 March 2022. The Code seeks to encourage parties to be flexible and to keep ongoing communication, seeking resolution where possible without legal action. It is important to note that the Code does still ensure the tenant remains liable for all outgoings and rental payments but advises landlords to support them where possible until they are back on their feet. We do not yet know whether the Code will change as a result of the new legislation.

At the time of writing, the new legislation is not yet available for review however we will update this page further once we know more.

If you have any queries about your commercial lease, please contact Jenny Colvin in our Commercial Property team on 023 9277 6558. If you would like to take action against a tenant for breach of the lease, please contact Helen Porter in our Commercial Litigation team on 023 8071 7425.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.