There are a number of options available to commercial tenants struggling to pay their rent but possibly the first step to take should be to secure such funding as is being made available by the government including the furlough scheme and the Coronavirus Business Interruption Loan Scheme for small and medium-sized businesses.
There are also opportunities to defer other major payments. Currently VAT payments due in the April – June quarter and payments on account for March -June can be deferred. Many businesses have already availed themselves of this boost to cash-flow by cancelling their VAT direct debit mandates to ensure payments are not made. However, with the country hopefully switching back on during the course of the summer those direct debit mandates will soon need to be reinstated once the deferral is over. The decision whether or not to take advantage of the deferral should not be taken lightly. Deferring may adversely affect a tenant’s standing with other creditors and/or investors and/or store up cash flow issues for the future.
Options for commercial tenants
Inevitably the assistance offered by the government and lenders may not be sufficient and so what are the options open to commercial tenants, perhaps with an otherwise sound business, struggling with cash-flow issues due to business interruption?
The first step has to be to talk to your landlord. Generally landlords are accepting that almost universally tenants are struggling to make payment of rent and, in the most needy of cases, landlords will often agree either to some form of rent holiday (where entitlement to rent for a period is waived for all time) or (as is more usual) there is an agreement that the rent for a period of time should be deferred to be paid at a future date. Some deferments involve a portion of rent being paid over the remainder of the term but it is a matter of negotiating what is realistic, bearing in mind the need of the landlord to consider its own liquidity and it may have banks or other lenders who will not allow the landlord to agree any rent concessions even if it would like to.
Whatever you agree with your landlord it is important to ensure it is documented and if you want to ensure that the variation in rent payment is irrevocable you should seek legal advice as unless the agreement is made formally it may not be binding, particularly if the landlord should sell the premises.
If no long term concession can be agreed with your landlord then if you currently pay quarterly consider asking your landlord to agree a variation allowing you to pay rent on a monthly basis in the future. Monthly rents were fast becoming commonplace even before the pandemic arrived.
Also consider whether there is anything you can offer a landlord in return for a rent concession. If there is a break clause in your lease you might want to suggest to your landlord that you would consider surrendering your rights under that clause in return for a cash payment and/or rent concession. This should be legally documented and it would be prudent to seek advice from a commercial agent as to what the value of the foregoing of that break right might be for the landlord and the agent may assist in the negotiations generally.
If despite discussions with your landlord an affordable rent concession cannot be agreed then the Coronavirus Act 2020 (CVA2020) contains a number of emergency measures that may be of assistance in resisting any aggressive moves your landlord might take to enforce payment or evict. Until 30 June 2020 (this may be extended) the following restrictions apply to most business tenancies:
- A landlord cannot seek by court action or physical changing of the locks to terminate the lease
- Any current court proceedings cannot result in an order for possession before 30 June
- A landlord cannot at the expiry of the lease use the tenants default in paying the rent during this period as a reason for refusing a new lease
A tenant company that is or is likely to become insolvent should seek urgent specialist advice from an insolvency practitioner. The definition of insolvency includes a debtor who is unable to pay their debts as they fall due. New measures are being put forward in a Bill, set to become law on 3 June, to protect companies including the ability to apply for a moratorium lasting for initially 20 working days to give breathing space and this would prevent a landlord from forfeiting a lease of company premises beyond 30 June (without court permission) and preventing other enforcement action to recover the rent from company assets. There is also the possibility of agreeing a restructuring plan with creditors (75% agreement is required) that would bind dissenting creditors and would avoid the need for administration or liquidation, providing valuable breathing space for companies in difficulty.
Additional protections in the Bill include the prohibition of landlords and other creditors petitioning for the winding up of a company between 27 April (retrospectively) and 20 June 2020 on the basis of a statutory demand served between 1 March and 30 June or otherwise as a result of a tenant company’s inability to pay. The exception is if the creditor can show a reasonable belief that Coronavirus has not had a financial effect on the debtor company or the circumstances giving rise to the insolvency would have arisen even if Coronavirus had not hit the debtor financially.
Legislation in this area is likely to change further in the coming weeks and whilst we will make every effort to keep this and our other pages current the law stated in this article is applicable as at 3 June 2020.
If you are struggling to pay your rent please contact a member of the Property Litigation team.
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