Q&A: Commercial rents and the Coronavirus Act 2020

Posted by Ince on 19th May 2020 -

Prior to Covid-19, the high street was already going through a fairly tough time and so the arrival of the global pandemic is nothing short of catastrophic. Commercial tenants are understandably seeking ways in which to survive these times; which inevitably leads to discussions with landlords in respect of the rents payable under the lease. We consider some of the common questions asked by clients in this respect.

Q) A tenant has asked to pay a reduced rent or to suspend the rent under the lease. Is the landlord obliged to agree to this?

There is no obligation on a landlord to agree to a tenant’s request for a reduced or suspended rent. Leases generally do not contain terms which allow a party to unilaterally reduce the rent. This must be done by agreement between the landlord and the tenant.

Q) The tenant has decided not to pay the rent in full or at all despite not having this agreed with the landlord. Can the landlord forfeit the lease?

The enforcement options available to the landlord have been temporarily reduced by the new legislation introduced by the new Coronavirus Act 2020 (CVA 2020).

Section 82 of the CVA 2020 contains express protections for commercial tenants that restrict the ability of the landlord to forfeit the lease during the “relevant period”.

The “relevant period” is defined as beginning with the day after the day on which the CVA 2020 passed (27 March 2020) and ending on 30 June 2020, but this period may be extended under Section 82(12). During the relevant period the following restrictions will apply in relation to commercial tenants:

• A right of re-entry or forfeiture for non-payment of rent may not be enforced;
• A landlord will not be considered to have waived its right of re-entry or forfeiture for non-payment of rent unless it gives an express waiver in writing;
• If High Court proceedings are already afoot to enforce a right of re-entry or forfeiture for non-payment of rent any possession order must ensure that possession is not be given by the tenant prior to the end of the relevant period;
• If the High Court has already made an order for possession to enforce a right of re-entry or forfeiture for non-payment of rent requiring possession during the relevant period, the tenant can apply to vary the order to provide that possession does not have to be given up prior to the end of the relevant period, and;
• In the County Court, if proceedings have already commenced to enforce a right of re-entry or forfeiture for non-payment of rent, any possession order must not specify a date for possession prior to the end of the relevant period. If an order has already been made then the date for possession in the order will be treated as being extended to the end of the relevant period.

The above restrictions do not prevent forfeiture action for breaches of the lease other than non-payment of rent.

Q) If the landlord cannot forfeit the lease under the CVA 2020, what are his/her options to recover the rent due?

There are other options for a landlord to recover rent, other than re-entry and forfeiture.

Rent Deposit

If the landlord received a rent deposit at the commencement of the lease it may be able to claim any arrears of rent from the deposit, subject to the terms of any rent deposit deed.

Claim from guarantor

If there is a guarantee in place (such as an AGA), this will remain enforceable to the extent that the tenant’s breach is enforceable against the tenant.

Court proceedings

There doesn’t appear to be any restriction on a landlord’s entitlement to pursue a court claim for recovery of rent from a tenant. If the premises were closed by the landlord without the tenant’s agreement then such a claim is not likely to be favoured by the courts and is susceptible to a counterclaim by the tenant.

Is there a sub-tenant?

A landlord is permitted by section 81 of the Tribunals, Courts and Enforcement Act 2007 to serve notice on a sub-tenant of the premises requiring it to pay rent directly to the landlord until the arrears have been cleared.

Commercial Rent Arrears Recovery (CRAR)

The right to exercise the provisions of CRAR ordinarily become effective after a tenant is in arrears for seven days or more. It allows the landlord to instruct an Enforcement Agent to follow a statutory procedure to seize goods of the tenant which would be sold and used to pay the rent arrears. The government however has increased the period of non-payment of rent to 90 days before CRAR can be used.

Q) Can the landlord serve a Statutory Demand on the tenant and petition for bankruptcy or winding-up if it is not paying its rent?

It would appear that this option has been removed during the relevant period. On 25 April 2020 the government announced measures to ban the use of statutory demands and winding-up petitions in order to protect the high street from aggressive rent collection.

The ban will be backdated to those made from 1 March 2020 but it is not yet clear if this will include demands that expire after 1 March 2020.

Q) If the landlord and tenant do agree on alternative terms in relation to rent under the lease, how should this be recorded?

This should be recorded in a side letter as this will be the least time consuming and less complicated means of recording the agreement. The side letter should include:

• The terms of the agreement including the length of time they will last;
• Circumstances allowing the landlord to revoke the terms;
• Confirmation that the other terms of the lease remain unaffected;
• That the letter will be disregarded on rent review;
• Provisions surrounding what happens on assignment;
• Confidentiality terms, and;
• Agreement of any guarantor to the terms.

Conclusion

The decisions for landlords in relation to enforcing payment of rents during the current climate is a difficult one, there are a number of interested parties involved.

The landlord has its own financial commitments and so it becomes a juggling act of trying to keep everybody on an even keel during very challenging times.

If the landlord’s goal is to ensure its premises remains tenanted then it is likely to be in its interest to negotiate and work with the tenant to agree terms that are realistic and achievable and to record these in a side letter. The other enforcement options are available but possibly a shorter term solution.

David Quinn is a Managing Associate in the Cardiff team of specialist Property Litigation lawyers at Ince. He regularly advises commercial tenants and landlords in relation to lease management issues and strategies. He will be very happy to have a no-obligation discussion about your case.

 

If you would like to discuss your property matters in more detail, please contact David Quinn, on 029 2167 2707 and by email on [email protected].