Questions from a landlord's perspective
My Tenant has asked for a rent holiday. I want to help them out at this time - how can I facilitate this?
Most landlords and tenants are working well together to reach agreement in respect of rent, either moving rental payments to monthly rather than quarterly in advance, or deferring rental obligations for a specified period. It is obviously preferable, but not necessarily essential, to have such arrangements documented in writing, as follows:
- the lease could be varied by a document called a ‘Deed of Variation’ or by a Side Letter so that the definition of ‘Annual Rent’ is changed to allow for a rent free period, followed by increased rent (to make up the shortfall) for the remainder of the lease term. This would have no impact on the length of the lease term.
If I don’t want to allow any rent-free period and the tenant has failed to pay the rent, what action can I take?
- In short, there is not a lot a landlord can do in a practical sense, certainly in the short-term. The Landlord is obviously liable to negative publicity if they choose to take any action and the Government may step in to legislate further if that is what they see landlords doing. Court processes may be slow to non-existent in any event at this time.
- Commercial tenants unable to pay any sums due under the Lease because of coronavirus are now legally protected from eviction / forfeiture (either by peaceable re-entry by the Landlord, or by possession proceedings in the court.) The Coronavirus Bill (which received Royal Assent on 26 March) means that no business can be forced out of their premises if they miss a payment between now and 30 June 2020. That date is likely to be further extended by the government in due course. Tenants will however remain liable for their rent during this period and any default interest provisions in a lease are unaffected. Further, tenants are not protected from possession being sought due to other breaches of a lease, such as disrepair, although it remains to be seen how quickly those cases would now progress in court.
I am considering taking action to make my tenant insolvent as they have not paid rent. What now?
Winding Up Petitions and Statutory Demands
The government has introduced further restrictions on a landlord’s ability to pursue certain enforcement action against a tenant by temporarily banning the use of statutory demands and winding up petitions presented until 30 June 2020 (and this date is likely to be extended), where a company cannot pay its bills due to coronavirus.
Whilst there are now restrictions on a landlord’s ability to make use of statutory demands, our understanding is that landlords will still be entitled to serve a statutory demand in a case where the tenant is not affected by COVID-19, can therefore pay its rent and is simply trying to take advantage of the COVID-19 situation.
It is not clear in which particular circumstances landlords will be prevented from issuing winding up petitions. The government has stated that “any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19.”
Exactly what is meant by “inability to pay (as a) result of COVID-19” or how the Court will review the petition is not clear. There will be an additional hurdle for a landlord to first overcome if it wishes to present a winding up petition. There will presumably be an initial hearing to decide whether the tenant’s inability to pay is as a result of COVID-19 and whether the petition can proceed. It appears that there is unlikely to be an outright ban on winding up petitions for arrears of rent.
It seems highly likely that there will be court cases in the near future which will test the definition of “inability to pay as a result of COVID-19.” Most tenants in the retail and leisure sectors have been badly affected by COVID-19, but what about supermarkets whose businesses are booming? It is of course extremely unlikely that the likes of Tesco and Sainsburys will not be paying their rent at the moment, but this does show that there is an extreme range of differing circumstances even in similar industries.
Commercial Rent Arrears Recovery
Commercial Rent Arrears Recovery (CRAR) is a statutory procedure which allows landlords of commercial premises to recover rent arrears by taking control of the tenant’s goods and selling them in order to pay off the debt. During the lockdown this has not been utilised fully due to social distancing provisions, but some Landlords have started the process by using Bailiffs to serve the initial notices.
A Landlord cannot currently use CRAR unless there are more than 90 days worth of rent in arrears. This will certainly take a lot of the immediate pressure away from tenants.
Questions from a tenant’s perspective
I’m going to struggle to pay my rent in the immediate future. What should I do?
Start a discussion with your Landlord as soon as possible. Ultimately it’s to the Landlord’s benefit to have a tenant in the premises (from a security perspective and in terms of payment of other outgoings such as utilities) and to avoid the hassle of trying to find a new tenant in the future – so they may be more amenable than you think to try to help, especially given the circumstances. You may be able to agree to a rent free period for a time, with either the term of the lease being extended by an according amount of months – or with the shortfall being picked up over the remainder of the lease term (i.e. paying a slightly higher annual rent once the rent-free period ends). The above section details the best way of putting this in place.
Can I simply end my lease early?
- Unfortunately no, you are on the hook until the contractual end date of the term of your Lease, unless you have an early break right expressly built into your Lease. If you do, then check very carefully the conditions attached to your right to exercise that break and make sure you strictly comply with the timescales for notice etc involved, as this is legally interpreted very strictly – even a day’s late notice can invalidate a break clause.
- Whilst most contracts include a ‘force majeure’ clause (a clause to protect parties in the event of unforeseen circumstances), in the UK Leases do not tend to include such provisions. Therefore there is no protection for the tenant in this sort of situation. In theory, it is possible legally to ‘frustrate’ a Contract, which can happen when an event occurs (without either party’s fault and for which the contract makes no sufficient provision) which so significantly changes the nature of the outstanding contractual rights/obligations from what the parties could have reasonably contemplated at the time it was made, that it would be unjust (in the new circumstances) to hold them to the terms of the contract – so both parties can walk away without liability. BUT, a change in circumstances which simply make the contractual obligations more difficult or expensive to fulfil is not enough – and there are very few cases (and NO lease cases) where a contracting party has successfully claimed that a contract has been frustrated. A business interruption of a few months is, in our view, not likely to lead to frustration of a lease. Each case will depend on its own particular facts, and the user clause in the lease, but it seems clear that the longer the lease term, the smaller the percentage of the term that will have been affected by Covid 19, and the less likely it is that the lease will have been frustrated. Conversely, if the lease term is short and most of the term has been affected by Covid 19, then there is a greater chance of arguing for frustration.
- It is also important to note that frustration would end the contract entirely, so it is of little benefit to those businesses that do wish to use their premises again in the future and simply want to argue that they should not pay rent whilst their premises were closed. We consider that there is unlikely to be any legal basis for arguing that a tenant should be able to go back into a property once the Covid 19 restrictions are eased, but that the tenant should not have to pay rent for those months when it was unable to occupy.Tenants have been calling for Landlords to “share the pain,” but it is unlikely that the Courts will agree with this sentiment.
These are still uncharted waters so the best advice to all landlords and tenants is to keep communication lines open, both with each other and with professional advisers.
Most landlord clients we have spoken to are generally amenable to tenant needs at this time. However, prior to agreeing to relax any formal requirements or agree to new or amended lease terms (relating to rent free periods, rent reviews, breaks or expiry, for example) it would be advisable to seek professional advice.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.