The Government has reiterated that it continues to work with lenders to ensure flexible support is provided to commercial landlords, including payment holidays and restructuring facilities.
There is an estimated £2.5 billion in rent due for payment on the June quarter day across the UK and industry experts are forecasting that only between 10% and 20% rent will be paid even though some landlords and tenants will have agreed rent concessions and rent deferment plans in relation to or following the March quarter day in light of the impact of the lockdown following the Covid-19 outbreak.
High profile retailers are approaching landlords to switch to turnover-based rents as a way of sharing risk and reward, but this raises issues for landlords in relation to banking covenants, protecting the value of their investments and agreeing how online sales will be treated especially as this will have formed and will continue to form a large part of the retailers’ sales and revenue stream. There is not a “one-size fits all” solution to the issues caused by this pandemic even taking into account the Government backed financial assistance through loans, grants and the Furlough scheme. Each tenant and landlord will face specific challenges which will need to be reviewed and discussed. For the most part, landlords and tenants have worked together recognising the challenges both parties face and concession letters or verbal arrangements have been agreed.
The Government has also extended the protective measures afforded to tenants by extending the moratorium against evictions until the end of September, to help support local businesses and seek to protect jobs but some landlords are petitioning the Government to also offer landlords some protection by way of subsidising the rental shortfall. The Government has maintained to date that financial support is available and although the moratoriums have protected tenants from eviction, the Government has always made it very clear that all rents under lease commitments are still due and payable in full. If a landlord and tenant negotiate a rent waiver or other concession, that is a matter of commercial negotiation between the parties.
The suspension of the forfeiture of evictions will come as a relief in particular to hotels, pubs, cafes and restaurants, after the hospitality sector called upon the Government for action in this area as these premises are yet to open to the general public and once they do on 4 July, their business will still be impacted due to the ongoing restrictive measures and Covid guidelines which have been put in place.
In addition to suspending the right to forfeit, the Government also proposes to prevent landlords using Commercial Rent Arrears Recovery unless they are owed 189 days of unpaid rent as well as extending the temporary ban on the use of statutory demands and winding-up petitions where a company cannot pay its bills due to Covid-19 until 30 September.
The current moratorium on forfeiture of a business lease applies to rent arrears only. Therefore the landlord’s right to forfeit a business lease for a breach of covenant by the tenant other than non payment of rent is unaffected by the Coronavirus Act 2020. For breaches other than non payment of rent, the landlord must first serve on the tenant a notice under Section 146 of the Law of Property Act 1925 specifying the breach. In general, if the breach isn’t remedied or if it is incapable of remedy the landlord may then proceed to forfeit the lease. Forfeiture action can be taken by the landlord peaceably re entering the premises or by an application to the Court for a Possession Order. Under the Coronavirus Act 2020, all possession proceedings are currently on hold until 23 August 2020.
Whether the landlord takes forfeiture action for breach of covenant other than for non payment of rent is a commercial decision for the landlord. The tenant will have the right to apply to the Court for relief from forfeiture and further the landlord must also take into account the Code referred to below in deciding whether or not to take back possession of the premises.
The landlord should also consider whether it has remedies against any third party. For example, if the lease was granted before 1 January 1996, the landlord may be entitled to make a claim against a former tenant or guarantor for payment of the rent owed by the current tenant. Where the lease was granted after 1 January 2020 and the current tenant is not the original tenant, the original tenant may have been required to enter into an Authorised Guarantee Agreement (AGA) under the Landlord & Tenant (Covenants) 1995 (the 1995 Act) as a condition of the landlord giving consent to the assignment. Further, the landlord may be entitled to request that a guarantor for the original tenant or the current tenant pays the arrears in accordance with the terms of any guarantee given.
An original tenant and/or guarantor should of course consider whether they have any grounds to argue that they have been released from their obligations to the landlord. In particular, a guarantor should look at any variations to the lease including recent rent concessions which may have been agreed between the landlord and the tenant as a result of the Covid-19 pandemic to establish whether there has been an implied release. For example, as a result of any variation to the lease made without the guarantor’s consent.
Where a landlord does have a claim against a former tenant or a guarantor the landlord must be mindful of the procedures under the 1995 Act for enforcing payment. In general, a landlord must serve on a former tenant or guarantor a notice under Section 17 of the 1995 Act setting out the arrears of rent and any other fixed charges which are in arrears. The notice must be in the form prescribed by the Act and must be served within 6 months beginning with the date on which the payment fell due. If a landlord fails to serve a Section 17 notice within the statutory time period the landlord will loose their right to recover the rent and other fixed charges. For example, where the current tenant did not pay the rent due on 25 March 2020, the landlord has until 25 September 2020 in which to serve a Section 17 notice on a former tenant or guarantor otherwise the right to recover payment of the March quarters rent from the third party may be lost.
A new Code of practice has been developed with leaders from the retail, hospitality and property sectors to provide clarity for businesses across all sectors impacted by the pandemic and to ensure landlords and tenants work collaboratively during these extremely challenging times. The Code follows the previous guidelines issued by the Government encouraging tenants to pay the rents in full if they are able to whilst urging landlords to cooperate and support tenants as far as possible.
A link to the new voluntary Code is below:
The effects of Covid-19 are far reaching and go well beyond rental payment but it has drastically changed the landscape for the retail, hospitality and office sector in particular. No single person in the world has had the same experience and each person has been affected by the lockdown in a different way- some very positively, others unfortunately less so. The high street and the industry need to reflect agility, resilience and adapt to the ever changing landscape.