Due to the Coronavirus pandemic tenants with commercial leases are having a difficult time and consequently landlords too. We know anecdotally that some tenants with large portfolios have already approached their landlords and agreed rent concessions.
Options available to landlords and tenants for commercial leases
This blog explains the implications of the Coronavirus Act for commercial leases and provides some of the options available to landlords and tenants. For residential tenancies please read our separate blog.
- Tenants have no automatic entitlement to rent reductions or rent holidays on commercial leases. Of course, the commercial backdrop presented by the current situation will lead many landlords and tenants to agree concessions between themselves: landlords are generally keen to see that their tenants get through the current extremely difficult period and they will be aware that it could be a struggle to re-let premises in the short/medium term.
- Some tenants will take unilateral action and landlords will have to decide for themselves how to respond, having regard to the commercial backdrop and to their legal position. The legal position is changing in some respects with the passage of the Coronavirus Act.
Forfeiture and the Coronavirus Act
- The Coronavirus legislation prevents landlords from initiating forfeiture for non-payment of rent until 25 March 2022. This is called the “relevant period”.
- The relevant period may be extended by the government. It has been extended several times.
- Rent includes service charge and insurance rent – not just the main rent payable under a commercial lease.
- Whilst the right to forfeiture is suspended by the Coronavirus legislation any acts of the landlord that would normally amount to an all time waiver of the right to forfeit for existing arrears will not be regarded as waiver. So a landlord can continue to demand rent, issue proceedings and generally take other enforcement action without fear of waiver.
- Forfeiture proceedings brought for reasons other than non-payment of rent are not affected by the Coronavirus legislation. The option for landlords to forfeit on the ground of tenant insolvency will continue although we must expect that the courts will be more willing to consider relief from forfeiture in the current climate.
Remedies other than forfeiture
- Rent deposits – Landlords are still able to draw on any rent deposit in accordance with the terms of the rent deposit deed.
- Guarantors – Landlords can still call on a tenant’s guarantor whether under a lease or an authorised guarantee agreement.
- Interest -Interest on unpaid rent will still accrue and be payable by a tenant in accordance with the terms of the lease.
- Debt claim, statutory demand and Commercial Rent Arrears Recovery (the process, known as CRAR, by which a landlord can, following written notice, enter the leased premises and seize goods to the value of the outstanding main rent) – Since the start of the crisis, these measures will have lost their practical effectiveness against tenants in genuine financial difficulty. Legislation was brought forward to restrict further the actions that landlords can take. Specifically the Corporate Insolvency and Governance Bill was expected to make the following provisions:
- The use of statutory demands made between certain dates will be banned.
- Winding up petitions may not be presented and winding up orders will not be made for a certain period where a company is unable to pay its debts because of Coronavirus.
- Landlords will be prevented from using CRAR unless the main rent is unpaid for at least 554 days.
- The new legislation came into force in late June 2020. Please see our blog “Winding up petitions for unpaid rent – commercial leases.”
Under the Coronavirus legislation, landlords cannot rely on non-payment of rent during the “relevant period” to oppose a lease renewal under the Landlord and Tenant Act 1954.
Break rights on commercial leases often come with conditions. Tenants should be aware that if they are unable to vacate premises owing to the lock-down then this could result in a break right being lost. Similarly, arrears of rent could endanger the operation of a break right.
Landlord’s loss of rent insurance
- Landlord insurance policies generally only protect landlord’s rental income where there has been physical damage to a property. It is unlikely to be relevant where a tenant stops paying rent for Coronavirus-related reasons.
- We would recommend that a landlord’s insurance policy is checked to see if there is reference to “pandemic or epidemic” as an insured risk. This would be unusual. If it is covered then it is possible that the rent suspension provisions of the lease will be engaged.
Tenant’s business interruption insurance
Tenants should speak to their insurers but, again, business interruption insurance would normally only apply where there has been physical damage to a property.
It is rare to see a force majeure clause in a modern lease, however that is not to say they don’t exist. These clauses are more commonly found in agreements for lease, development agreements and commercial contracts. If you do have a force majeure clause in your agreement then you should review it carefully and seek advice.
Frustration allows an agreement to be set aside where an unforeseen event makes it impossible for the parties to perform their obligations. Technically a lease could be frustrated. The bar is very high, though, and we are not aware of any cases where a lease has been found to have been frustrated.
If you have any queries relating to any of the issues raised above or indeed any other commercial lease queries please email Edward Watson, David Eminton or Nicola Davies.
Our dedicated “Coronavirus – Legal advice and guidance” page contains advice and guidance on matters affecting, businesses, employers, self-employed, employees, planning legislation, property etc. and is regularly updated as and when new guidance comes in from the government or other regulated bodies.