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What are the temporary measures announced to protect commercial tenants and how should landlords respond?
Most commercial tenants in the retail and hospitality sector have been forced to close their premises. Many have found that, without any income, they have simply been unable to pay their rent. However, whilst some landlords have been co-operative, others have adopted a more aggressive approach and have threatened to wind up the tenant or to enter into the premises and take the tenant’s goods and sell them to cover the rent arrears (Commercial Rent Arrears Recovery).
In response, on 23 April, the government announced further measures to protect commercial tenants against aggressive rent collection from their landlords. If you are a commercial landlord or tenant and have any questions regarding these measures and their implications, our Commercial Property team is ready to assist.
Under the Coronavirus Act 2020, measures were put in place that stopped landlords of a business tenancy from forfeiting the lease for non-payment of rent until at least 30 June 2020. Whilst those measures were welcomed, they were very limited in scope. They didn’t provide any kind of rent-free period and, in particular, they didn’t stop the landlord from taking other enforcement action against its tenants.
The government has recognised that some landlords put commercial tenants under undue pressure by using aggressive debt collection recovery tactics which it has described as an unfair practice. Faced with significant pressure from the industry, the government intends to extend the protection given to commercial tenants by introducing the following proposed measures:
- A temporary ban on the use of statutory demands (made between 1 March 2020 and 30 June 2020)
- A similar ban on winding up petitions presented from 27 April to 30 June. In normal circumstances, a landlord could also consider bankruptcy proceedings against an individual tenant or winding up proceedings against a corporate tenant. Instead, the Government will temporarily ban the use of statutory demands and winding up orders where a tenant cannot pay their bills due to coronavirus, to ensure they do not fall under deeper financial strain.
- Restrictions on the use of Commercial Rent Arrears Recovery, so a landlord may only use it if there are owed 90 days of unpaid rent. In normal circumstances, a landlord could use the Commercial Rent Arrears Recovery (CRAR) procedure which would allow a landlord to take control of their tenant’s goods and sell them in order to recover a sum equal to the unpaid rent.
Details of the measures will be included in the Corporate Insolvency and Governance Bill, which is due to be published imminently.
So, given the present circumstances and in light of these proposals, what should a landlord do?
They should first look carefully at the terms of the lease and, if the tenant pleads that they cannot pay, ask for evidence of financial hardship. Possible courses of action include:
- Agreeing a rent concession with the tenant. This could take the form of a deferment of rent or an outright waiver. It’s important to properly document any such arrangement to avoid any future disputes about what is agreed and preclude any argument that the lease has been permanently varied. We can assist in preparing a suitable document.
- Drawing upon other security provided by the tenant (such as a rent deposit) to cover the rent arrears.
- It may be possible to obtain payment from third parties, such as a tenant’s guarantor, a former tenant, or even a former tenant’s guarantor for the non-payment of rent.
- Section 82 of the Coronavirus Act 2020 has imposed a moratorium on the right that the landlord would normally have to forfeit the lease. This means a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent (in this context meaning any payment due under the lease, so including service charges and insurance rent) may not be enforced, by action or otherwise, during the period from 26 March 2019 to 30 June 2020. This latter date may be extended. Even without a moratorium, forfeiture would be a very draconian option as it will bring the lease to an end. Therefore, it’s only worth considering if the landlord is extremely confident of being able to re-let or re-develop the property concerned, or if the landlord considers that selling their property with vacant possession is financially attractive. It is, nevertheless, important for landlords to seek legal advice at an early stage to ensure that they preserve their right to forfeit the lease.
- It may be possible to bring the lease to an end by serving notice on the tenant or, alternatively, a landlord might agree a surrender of the lease with the tenant.
In conclusion, it’s important for landlords to take a pragmatic commercial view, and to consider the medium to long term future. Even though some landlords might be tempted to end the relationship with tenants who have previously proved unreliable, they must remember their potential liability for business rates for an empty property, as well as possible reputational risks of taking action that might be considered harsh against a tenant suffering from financial hardship as a result of the pandemic.
The non-payment of rent may also have adverse consequences for the tenant. A tenant may lose the ability to exercise a break clause if there are rent arrears. In addition, if the tenant has security of tenure, persistent non-payment of rent may enable their landlord to successfully oppose an application to renew the lease.
It’s so important to seek early advice to review the documents which govern your particular rights and obligations in light of your current situation, and to help you to understand the pros and cons of all the options available to you. All our experts are on hand to assist, by phone, email or video call so don’t hesitate to get in touch if you need further guidance.