With many premises now either officially closed or largely empty, with work from home being the new norm and a rent quarter day just gone, businesses are facing unprecedented challenges in a world where circumstances are changing daily (if not quicker).
The Coronavirus Act 2020 ("the Act") is now in force but what does it mean for landlords and tenants and how can they keep the plates spinning?
Which tenants does the Act apply to?
The Act is drafted broadly and refers to those tenants and occupiers who are occupying for the purpose of carrying on a business. Therefore, the Act is likely to catch most commercial tenants.
What does the Act do?
Forfeiture and non payment of Rent
The Act postpones the landlord's ability to exercise its right of forfeiture in respect of non-payment of rent against a business tenant during the period commencing 26 March until at least 30 June 2020 ("postponement period"). The Act allows the government to extend the initial postponement period.
This does not change the obligation to pay the rent (or adding interest on late rent) and the landlord is free to pursue other enforcement action (see below).
The postponement also applies to any court orders made relating to forfeiture proceedings for non-payment of rent from the High Court or County Court in respect of ongoing applications. No court orders will be made requiring a tenant to give possession to a landlord of premises prior to the expiry of 30 June or any longer postponement period.
Rent is widely defined in the Act to include any sums due under a lease, so not just annual rent but also service charge, insurance rent and other outgoings. Although not all may trigger forfeiture under the terms of the lease.
From a practical perspective, depending on the length of the COVID-19 measures, the postponement period may need to be extended at a later date because whilst tenants will have been trading in the first quarter of 2020 (and so in theory should have the funds to pay the current quarter), they may not have the funds to pay the next quarter after three months of limited or no trading.
The reality is although tenants may have some funds to pay the rent, they are likely to try and utilise this cash elsewhere in their business for so long as the measures are in place. However, this is very much kicking the problem into the long grass and ideally open dialogue should be encouraged, with a view to more collaborative arrangements between landlords and tenants. It is recognised that parties do need to survive but they also need to have an eye on the future. A tricky balance!
Tenant request for a renewal lease under the LTA 1954
A landlord is to disregard persistent delay in paying rent during the postponement period as a ground for opposing a renewal request from a tenant under the Landlord and Tenant Act 1954.
Importantly the Act does not amount to a waiver of a landlord's right of forfeiture for non-payment of rent. The ability to exercise the right is simply delayed until after the expiry of the postponement period.
Once the postponement period has expired a tenant will be required to pay all of the rent due from the preceding period where the rent was not paid (including any interest) in order to avoid forfeiture. A tenant should consider how they will manage their cash flow after the postponement period ends in order to meet those rent liabilities.
Does the Act stop the landlord doing anything to recover rent?
The spirit the government is trying to foster is that we are all in this together and should be assisting each other where possible. A landlord also needs to have an eye on the long term impact of pursuing remedies if it is likely to end up with empty premises.
The landlord does have other remedies available aside from forfeiture:
Debt claim: The Act does not prevent the landlord from making a claim for breach of the obligation to pay the rent as a debt claim through court proceedings.
Rent deposit: The landlord may also enforce by drawing down from any rent deposit held.
Guarantor claim: The landlord may seek payment from a guarantor of the lease.
Commercial Rent Arrears Recovery (CRAR): This allows a landlord to enter the rented premises and seize assets of the tenant of an amount equivalent to the rent owed. There are some clear practical issues here in the current lockdown environment. Landlord must also carefully consider how the exercise of this remedy may affect any right of forfeiture in the future.
Statutory demand: A landlord may issue a statutory demand in relation to unpaid rent as a first step towards threatening winding up proceedings.
Can proceedings be brought in relation to other grounds for forfeiture?
The Act does not restrict the landlord from exercising its right to forfeit a lease for another reason, such as insolvency of the tenant or for breach of the repair or other obligations. It is likely, however, that depending on the circumstances a court may grant relief from forfeiture at the present time (for example, where a tenant has not been able to carry out repairs due to the lockdown measures in place). In any event, the tenant may not be able to vacate if it can't locate a removal company.
Does the Act give any relief on funding?
The Act does not suspend any obligations that the landlord owes to its bank.
As these measures are being brought in by legislation, this may assist some landlords as there are sometimes carve outs in facility agreements where certain action or inaction (as the case may be) is in compliance with law. The financing sector is under increased pressure to assist businesses in these challenging times. Although banks may have to accept landlords may not be in strict compliance with their facility agreements during the COVID-19 crisis there are no benefits in the Act (a mortgage holiday equivalent) that a landlord can pass on to occupiers.
The Act is not the solution but it should encourage open dialogue. Many landlords are agreeing rent deferrals, monthly payments or other concessions in the circumstances. If it is possible to agree a reduction in services to premises, then service charges will also be reduced.
As mentioned above, a landlord does have other remedies and making up a shortfall out of a rent deposit where available, with a deferral on the requirement to top back up, could be one compromise.
The reputational element for all parties and the spirit of co-operation should also be paramount considerations. One discussion we have been having with clients on lease renewals is the inclusion of an upward and downward rent review in 12 months or so to avoid any unfair long term gain being made due to current uncertainties.
The Act contains powers for the government to further close or restrict entry to premises. This has applied to date only to certain businesses. As yet, landlords have not been required to close all buildings (such as offices / business and science parks). A lease confers a right for a tenant to occupy its premises and it is generally not permissible to prevent a tenant's access. Many leases however do contain provisions which will allow a landlord to limit services in the current circumstances. All parties need to keep an eye on further guidance or directions issued by the government and take steps to ensure compliance. If there are further restrictions put in place, it is likely the current business rates holiday that applies to certain sectors will also need to be extended.
There is also likely to be a raft of further legislation to supplement the hastily drafted Act and any future measures!