Rental revenue legal options during Covid-19

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 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 after the crisis is over, which it says may be on 30 June 2020 or later if delayed by statutory instrument.

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

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 and serve statutory demands. 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). The Coronavirus Act has created a change to the effects of CRAR.

Where a landlord uses CRAR to recover unpaid rent, it is deemed to have waived its right to forfeit the lease.  However, the Act says that no conduct by the landlord can be regarded as waiving its right to forfeit the lease and that such a waiver can only be given expressly in writing. It appears then that a landlord can exercise CRAR without affecting its rights of forfeiture.  However, it may be difficult to exercise CRAR in the current circumstances as the premises may be closed. 

In addition, there is a further tactical problem with attempting recovery from a tenant which is 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 and serving statutory demands will do little other than increase the landlord’s costs. If the guarantor is similarly impacted by the crisis 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.

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.

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 way the lease is drafted.

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

Help available

For more detailed help and advice with commercial tenancies, please contact our commercial property/local government lead partner Sandy Munroe or our senior specialist commercial property litigator Phil Scully.