Coronavirus - advice for commercial landlords and tenants - tenant unable to pay lease rent

We have advised a number of landlord and tenant clients over the last couple of weeks relating to options available if coronavirus is making a tenant unable to pay their rents, and suggested ways forward for both parties.

Questions from a landlord’s perspective

My Tenant has asked for a rent-free period. I want to help them out at this time - how can I facilitate this?

There are different ways that this could be dealt with:

• 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’ gets changed to allow for a rent free period, following 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.
• the Landlord could allow a rent-free period and then enter into a document to extend the term of the lease for that same period. This however can lead to unforeseen legal issues – when the term of a lease is extended, in law this automatically ends the existing Lease and creates a new lease. This could then lead to Land Registry registration issues, Stamp Duty Land Tax issues for the Tenant, and (most importantly for the Landlord) the Landlord inadvertently granting a new lease which has security of tenure for the Tenant. In addition, if there is a guarantor or rent deposit under the original lease this would fall away – the rent deposit would become due back to the tenant and the guarantor would no longer be ‘on the hook’. Landlords need to be really careful if they decide to follow this route as there are many unseen dangers.
• the Landlord could allow a rent-free period and then enter into a new separate lease now for the period of additional time, which starts on the day after the original lease term ends (this is called a “reversionary lease”). It can be easily drafted with reference to (and incorporating) all the terms of the original lease. As it is likely to be short-term, such as a few months, it is unlikely to attract any SDLT liability for the tenant but it will be required to be registered at the Land Registry if it has a term starting more than 3 months in the future – so will require a LR-compliant lease plan.

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. 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.
• There is nothing in the Act in relation to Commercial Rent Arrears Recovery (CRAR) which remains an option for landlords to explore as well as looking to any guarantors who are in place. There has been no guidance yet from the Government on this.

My Tenant is insolvent. What now?

• The usual remedies of suing for outstanding sums, forfeiture and CRAR are likely to be of little use to a landlord whose tenant is facing insolvency at the moment.
• In the case of companies who enter CVA or a form of administration, the landlord will not generally be able to pursue any action against the tenant without permission from the court.
• All winding up petitions have been adjoured by the Courts for at least 12-19 weeks. Even once such matters commence again, in the case of winding up or liquidation (and CVA), a landlord is likely to only receive a proportion of what is owed to it, together with any other creditors which the tenant may have.

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.

Summary

We are in uncharted waters here 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.

Boyes Turner LLP is very much open for business and the Property Group are all working remotely so are available to provide advice as and when required.