Covid-19 and commercial rents

Commercial and local authority landlords are seeing their rental revenues crushed by the Covid-19 crisis, and many could benefit from urgently reviewing their legal options.

While the emergency measures in the Coronavirus Act 2020 (the Act) protect tenants from being evicted for non-payment of rent during the current economic slump, landlords still have to pay their lenders and, in most cases, maintain and service their buildings. The result is that many commercial and local authority landlords are caught between continuing costs and a dramatic decrease in income.

In more usual times, landlords can rely on the forfeiture provisions contained in almost all modern commercial leases giving them the power to re-enter the premises if the tenant does not pay rent. But section 82 of the Act effectively bans re-entry due to non-payment of rent until 30 June 2020 or later if delayed by statutory instrument. As a matter of law and subject to future guidance, rent shall remain payable.

The provisions within the Act ensure that a landlord will not waive its right to forfeit, nor prevent forfeiture taking place for breaches of the lease other than non-payment of the rent.

However, it should be noted that under CPR PD51Z, the Civil Procedure Rules appear to go further than the Act as it imposes a stay of 90 days on all proceedings for possession and enforcement action from 27 March 2020. This would cover proceedings against trespassers, which the Act does not do, except (following further amendment of the Practice Direction) against persons unknown under CPR 55.6. It remains to be seen how the Courts will interpret the Act and PD51Z together in practice, but this should be borne in mind before any action is taken by a landlord for breaches other than just payment of rent.

Further, pursuant to recent guidance, the Government is banning commercial landlords from using statutory demands in regards to arrears that have been accrued as a result of coronavirus. This ban applies from 1 March 2020 until 30 June 2020 (which may be extended). There is also a bar on seeking bankruptcy or liquidation where the arrears are as a result of coronavirus; the Courts will review the circumstances before any petition proceeds.

As commercial tenants throughout the country suffer the consequences of lockdown and become unable to pay their rents, landlords are prohibited from replacing them with tenants who can pay.

The prohibitions extend to almost every kind of commercial tenancy, whether or not it is contracted out of the Landlord and Tenant Act 1954, and even if arrears and/or forfeiture proceedings began before the Covid-19 crisis began. Unpaid rent under the terms of the Act includes unpaid service charges and insurance rent.

Options to consider

Recovery of rent

Though the Act places restrictions on a landlord’s right of re-entry, there are other ways of attempting to recover unpaid rent that remain available.

It is still possible to issue debt recovery proceedings (it should be noted that Court proceedings are unlikely to be dealt with in the near future as the Court system is prioritising urgent work) and depending on the terms of the rent deposit deed and lease; a landlord may also be able to draw from the deposit to cover arrears or pursue the guarantor. The documents should be studied carefully before pursuing this approach.

Another potential remedy is distress or seizing the tenant’s goods and selling them, now known as on commercial rent arrears recovery (CRAR). However, where a landlord uses CRAR to recover unpaid rent, it is deemed to have waived its right to forfeit the lease. There seems a significant risk that in using CRAR to recover unpaid rent, there would also be a waiver under the Act as the process of CRAR requires express written notice to the tenant.

Rent cessation

In addition, there is a further tactical problem with attempting recovery from a tenant genuinely in financial difficulty. The tenant’s business may be crippled if its remaining cash reserves are used to pay rent, and this may leave the landlord without a tenant to occupy the leased premises.

If the tenant is genuinely unable to pay rent, it will not be able to pay even if ordered to do so by the Court. In such circumstances, remedies such as issuing debt recovery proceedings will do little other than increase the landlord’s costs. If the crisis similarly impacts the guarantor or there is none, the best course of action may be to open a discussion where both parties can work towards an amicable solution.

In some cases, it may be sensible to agree a “rent holiday” whereby payment of rent by the tenant is deferred to an agreed date in the future, or a temporarily reduced rate of rent may be agreed. It is usually prudent to ensure such agreements are properly documented in a professionally drafted variation to the lease or supplemental agreement and in particular, ensure that that the basis upon which rent, service charge and/or insurance rents shall be deferred, waived or suspended are clearly detailed.

It is worth noting that explicit rental suspension clauses contained within a lease usually apply where there has been physical damage or destruction to property (including access/egress to it).

In terms of lessening costs, it is important to study the lease carefully. A typical commercial lease does not include force majeure clauses suspending the parties’ obligations, meaning, in most cases, landlords will still be required to comply with obligations to provide access to the premises and service media and services. However, the wording of the lease in question should be checked for any suspension rights.

Where the property is mortgaged, and rent has reduced or dried up altogether, the landlord should also consider asking its mortgage provider if deferring payments or refinancing to more manageable rates of repayment are possible. Any such arrangement should be properly documented. 

Building closures

Some commercial and local authority landlords are currently introducing building closures. Some of these, such as restaurants, museums, galleries, bars and theatres, are mandated by Central Government under the Health Protection (Coronavirus, Business Closure) (England) Regulations 2020.

With compulsory closures, the interference with the tenant’s rights under the lease will not give the tenant a cause of action against the landlord. Where the landlord voluntarily closes the building, however, such a cause of action may arise depending on the provisions contained within the lease.

Most leases contain a landlord covenant to give the tenant quiet enjoyment of the premises without any lawful interruption by the landlord. There is a question of whether the landlord’s decision to close a building would be a breach of the tenant’s quiet enjoyment provision unless closure is required for compliance with statutory obligation (then a landlord would usually have a defence to any such claim of breach this covenant).

The guidance so far is that closure could be in breach unless and until the Government legislates to require closure. In the absence of such legislation, then current guidance is not to close premises and implement other options such as maintaining skeleton staff on the part of the landlord/ management to facilitate access or affording the tenant with temporary access to the common parts without the landlord’s presence.

A tenant could have a claim to regain entry and damages if they can demonstrate loss. Tenants who have remained in situ may claim for loss of profits and a rent reimbursement. This may be more difficult for those tenants who have either chosen to close their business or are working from home under government advice.

This article relates to commercial and local authority landlords. There is Guidance about the impact of COVID-19 for residential landlords, but there is no such guidance in respect of commercial landlords.

Help available

For more detailed help and advice with commercial tenancies, please contact our senior specialist commercial property litigator Phil Scully.

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