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Coronavirus and Commercial Leases: What has changed so far?

View profile for Luigi Bernardis
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Due to the ongoing COVID-19 pandemic, Landlords and Tenants are under extreme pressure to maintain their obligations under the terms of their commercial leases. Restrictions have been placed on Landlords’ remedies under the Coronavirus Act 2020 and this has created a lack of balance between the rights of Tenants and Landlords. The Act now provides a significant amount of security for Tenants of commercial properties who are struggling to pay their rent. For example, the Act restricts the right of re-entry or forfeiture for non-payment of rent during this crisis. Under normal circumstances, Landlords enjoy a varied range of remedies for dealing with defaulting tenants. These are forfeiture (right of re-entry), Commercial Rent Arrears Recovery (CRAR), debt claim, and enforcement of security (the right of landlord to enforce any security they have against the tenant’s non-performance).

However, the Government’s decision to take action during the lock down with regards to commercial leases has temporarily limited the remedies available to Landlords. With the enforcement of the Coronavirus Act 2020 (https://www.legislation.gov.uk/ukpga/2020/7/contents/enacted), Landlords are now not allowed to evict a tenant for the non-payment of rent during the relevant rent period (from 26th March until 30th September 2020) under a commercial lease and the Courts are currently unable to make an order for possession.

The relevant rent period was initially due to end on 30 June 2020 but it has been subsequently extended to 30th September 2020. The Act does not have an impact on short leases, which term is less than six months and it also does not apply to contractual agreements that do not amount to a lease. The new legislation has also made it clear that as COVID-19 is not required to be the only cause of the tenant’s failure to pay the sums due. Accordingly, the limitations on forfeiture (right of re-entry) during the relevant rent period of the commercial lease apply regardless of the tenant's reasons for non-payment.

In addition to the Coronavirus Act 2020 with the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulation 2020 (https://www.legislation.gov.uk/uksi/2020/451/contents/made) the Government has extended the emergency measures to prevent Landlords from instructing Enforcement Agents to size and sell a Tenant’s goods in order to recover rent, known as CRAR (Commercial Rent Arrears Recovery), unless they are owed 90 days or more of unpaid rent. Additionally, in accordance with the said Regulation, CRAR is not available where a Tenant has made a partial payment of the sum due. On the other hand, Landlords are afforded an extension on the time period for taking control of the Tenants’ goods. This is usually 12 months from the date of the Notice of Enforcement but, subject to some details, is now extended for a further 12 months.

Furthermore, on 26th June 2020 the Corporate Insolvency and Governance Bill 2020 (https://www.legislation.gov.uk/ukpga/2020/12/contents/enacted) came into force, which concerns the position of the Government on the using of insolvency procedures by Landlords to recover rent arrears. The bill restricts the issuing of a debt-related winding-up petition where a company cannot pay its bills (including rent) due to COVID-19. The bill has also included a new moratorium process and revoked the existing small company CVA moratorium. This has become an important recovery option for struggling companies during COVID-19. The moratorium now gives companies some space (20 working days) from creditor action if a company become unable to pay its debts. The moratorium may seem as another layer of protection for defaulting Tenants, but the directors of the company need to confirm that the debts will be paid before expiration of the moratorium period.  The monitor (i.e. an insolvency practitioner appointed to overseeing the company’s affairs) needs to bring the moratorium to an end if he or she thinks that the company is unable to pay its debts.

It is important to emphasise that there still are remedies available to the Landlords. Landlords may still forfeit for tenant breaches, excluding non-payment of rent, such as tenant insolvency. Bringing a debt claim against their Tenants is also an option for Landlords.

Therefore, the most important thing to do at the moment is to keep track of any arrangements agreed with Tenants and make sure that such agreements are documented in writing. Working together as Landlord and Tenant and complying with the Government’s regulations is fundamentally important and on that respect the Government has recently published a not binding Code of Practice https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector/code-of-practice-for-commercial-property-relationships-during-the-covid-19-pan) which aims to help Landlords and Tenants to work together to find workable and fair solutions to protect viable businesses.

The main principles of the code of practice display that transparency and collaboration are crucial in all dealings between Landlords and Tenants. Landlords and Tenants should both act reasonably, swiftly, transparently, and in good faith when seeking arrangements and when making changes to the rental payments. Tenants pursuing concessions should be clear with their Landlords on why they need this and be able to provide financial information about their businesses to explain their request.

In considering a Tenant’s request to negotiate their rent Landlords may wish to bear in mind that the Tenant’s financial position may have been impacted across their business due to the extra costs and obligations through protecting customers to adhere to social distancing requirements and the closure period impacting the Tenant’s business and ability to trade via other means. Landlords should also ensure that service charge costs are reduced where practicable and consistent with providing best value for occupiers. The frequency of the Tenant’s service charge payments should be also spread over shorter periods where it is possible.

Disclaimer: These articles are for information purposes only and are not intended as legal advice. Professional advice should always be obtained before applying any information to particular circumstances.

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