Landlords, Tenants and COVID-19Commercial Property
Whilst the Coronavirus Act 2020 provides some comfort for both Landlords in that they will not waive their rights to bring forfeiture proceedings, and Tenants in that they will be protected from losing their business premises for non-payment of rent; the question remains, has the Act gone far enough?
From a Tenant’s perspective, the main objective during this difficult period will be keeping your business afloat. Whether you are in the business of providing services or products, this virus outbreak is having a swift and challenging impact on all areas of the economy. The question is often being asked: “Do I still need to pay my rent?” and the short answer is, yes, unless a formal agreement can be reach with your Landlord.
Although there is now a 3 month period of relief from forfeiture provisions (which may be extended by the government), this relief does not remove or reduce the obligation to pay rent, it is simply a deferral and rental arrears will continue to accrue. It is unlikely that a Lease will provide for suspension of rent in any circumstances other than destruction or damage of the premises themselves and a Landlord will still have available to them alternative means of enforcing the payment of rent; for example issuing a statutory demand, commencing winding up proceedings, Commercial Rent Arrears Recovery (CRAR) or issuing other forms of debt claims. In addition, it does not preclude Landlords from claiming interest on any unpaid sums or deducting the amount owed from any rent deposits held.
This does not, however, prevent negotiations from being undertaken to establish a viable way forward for both parties, for example deferral of rent payments or rent free period. In addition, tenants may also have the benefit of break clauses within their leases which may be exercisable, depending on their frequency and these will need to be reviewed on an individual basis.
As a Landlord, there are a number of factors which need to be considered. For example, you may have borrowing against a tenanted property. The Act does not provide any relief in terms of a Landlord’s obligations to any Lender so negotiations may be required to reduce or suspend any payments due under the terms of the loan agreement. This would be in a similar manner to the mortgage holidays that are being offered in the residential sector. Unfortunately in the commercial sector there is no obligation on the lender to offer such concessions but our specialist banking team can assist and advise in relation to negotiations.
Tenants may try to argue that their Lease is frustrated or a breach of Landlord covenant has arisen; for example where properties (e.g. shopping centres) are forced to close and the covenant for quiet enjoyment is breached. However, frustration can only be established when an unexpected event, which is not provided for in the Lease, causes such a significant change to the parties' obligations so as to bring the Lease to an end. The suspension of use of a property due to the virus is unlikely to constitute this on the basis that it is temporary. In addition, any legal requirement to close properties or closure pursuant to government advice will likely be an adequate defence to any Tenant’s claim for breach of covenant.
Landlords may also have the benefit of contractual provisions relieving them of service obligations, where the provision of the same is out of their control; for example contractors being closed or sick due to the virus. Again, this is something which will need to be reviewed on an individual Lease by Lease basis.
Please also note that the relief from forfeiture provisions provided by the new Act will have the effect of delaying any existing proceedings for forfeiture of non-payment of rent but will not prevent an application for forfeiture for some other breach which is not restricted by the new Act and our expert team of property dispute resolution solicitors will be able to assist in this regard.
In practical terms, reasonable and realistic conversations between Landlords and Tenants must be encouraged as early as possible in order to avoid the negative impact any tenant insolvency would have on both parties. As the restrictions upon movement and working conditions continue, both Landlords and Tenants need to take a pragmatic and commercial approach in order to navigate these unprecedented circumstances. Advice should be sought at an early stage, to enable any negotiations to be correctly documented.Print Back to Blog