Landlords and tenants coping with COVID-19 – where are we now?

This article was written by Sanam Hussain. As this is a fast moving topic, please note that this article is current as at 08/06/20. For further information, please contact Sanam Hussain, Simon Dawes or Angela Bhaseen.

Introduction

We are now into the twelfth week of lockdown. Some restrictions are beginning to ease, such as the opening of shops or stalls that can do all or most of their trading outside. These were allowed to re-open from 1 June 2020.

From 15 June 2020, retailers of non-essential goods such as clothes, furniture, toys, electronics and indoor markets can resume trading. The operators of these shops will need to ensure that social distancing guidelines can be adequately implemented in-store.

The majority of these retailers will have leases of their premises which normally require rent to be paid quarterly on set quarter days. The next usual quarter day of 24 June is fast approaching. With certain high-profile tenants likely to continue to withhold rent, landlords and tenants will want some badly needed certainty on where we are with COVID-19 measures affecting commercial lettings, and what might happen next for upcoming lease payments.

The government announced the lockdown on 23 March – two days prior to the March quarter date. It was widely reported that landlords’ rent collection in March was significantly lower than the previous year due to the financial impact of COVID-19. Concerned that landlords would commence legal proceedings against such tenants, we saw the government introduce a series of measures restricting a landlord’s remedies for unpaid rents.

Below is a summary of measures that are currently in place and, should tenants also fail to pay the June quarter’s rent (or where tenants did not pay the March quarter’s rent and that is still outstanding), the options available to landlords seeking recovery of sums due under the lease.

Forfeiture

Forfeiture is a right for a landlord to terminate a lease for tenant breaches, including failure to pay rent or other the sums due under the lease (such as service charge and insurance rent).

Under the Coronavirus Act 2020, forfeiture for non-payment could not be enforced from 26 March to 30 June 2020. This period may be extended especially in light of the Prime Minister’s announcement on 10 May 2020 that no changes would be made to measures affecting the hospitality sector until July at the earliest.

Crucially, however, if this period is not extended or only extended for some sectors (such as hospitality), the legislation states that no conduct by or on behalf of the landlord is to be regarded as waiving the right to forfeit the lease unless the landlord has waived it expressly in writing.

Landlords whose tenants have not paid some or all of their rent for either the March quarter or June quarter (or both), can (subject to any extension of this provision) take steps to forfeit the lease. Whether or not they do so is likely to be a finely balanced decision given the current economic climate.

Commercial Rent Arrears Recovery (CRAR)

If a tenant is in arrears of an amount equivalent to seven or more days rent, the CRAR procedure allows a landlord to serve a notice demanding payment. If the tenant fails to comply, the landlord may instruct an enforcement agent to seize assets belonging to the tenant and sell them at a public auction, with the proceeds of sale being used to repay the outstanding arrears.

Regulations introduced by the government on 24 April 2020 extended the level of arrears so that the right of CRAR arises for a landlord only where there is an amount equal to 90 days’ rent outstanding. The earliest the landlord could utilise the CRAR procedure is the 30 June 2020 . However, this period may be extended.

Statutory demands and winding up petitions

A landlord is able to make a statutory demand on a tenant (that is a company entity) where the landlord is owed £750 or more. The tenant then has 21 days to pay the outstanding sum failing which the landlord can present a winding-up petition to the court to wind up the tenant.

The Corporate Insolvency and Governance Bill includes a temporary ban on the use of statutory demands that are made between 1 March 2020 and 30 June 2020 and any winding-up petitions presented at court from Monday 27 April 2020 through to 30 June 2020, where a company cannot pay its bills due to COVID-19.

Landlords can still present a winding up petition at court on the basis of a statutory demand made between 1 March 2020 and 30 June provided the landlord has reasonable grounds for believing COVID-19 has not had a financial effect on the tenant company or the debt issues would have arisen anyway.

Comment

A few lucky tenants had generous landlords who cancelled their March quarter’s rent. Large numbers of tenants took steps as early as February to agree with their landlords to switch their quarterly rental payments to monthly payments, or may have been granted a rent payment holiday. Some tenants however simply could not pay the rent or refused to pay.

For the tenants that were able to and did take swift action in February and early March, the impending June quarter may be of little significance. However, for landlords whose tenants did not request or were not granted such concessions, the rent collection statistics for the June quarter date will be eagerly watched and may be a key indicator of things to come.

The hospitality and leisure sector is not expected to resume trading until 1 July at the earliest, with no certainty of revenues even when they do so. Those operators are likely to still be closed come 24 June and consequently might be unable to meet their rental obligations. Those retailers who did open their doors on the 1 June or are planning to open on 15 June may still struggle to pay rent for the June quarter.

Will we therefore see a flurry of landlords, who have felt the full impact of rent payment measures, utilising any of the above procedures? The government will be very keen to avoid businesses being hit with further turmoil by landlords taking enforcement action and are likely to extend the above periods – but how long this can continue is anybody’s guess.

The government has announced that it is working with businesses and trade associations to publish a code that is intended to provide ‘clarity and reassurance’ to both commercial tenants and landlords over rent payments. We await the details .

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