Posted by Natasha Bowcott, Senior Associate
Coronavirus and your tenants: a commercial landlord’s guide
Commercial landlords: our Real Estate team offers guidance on dealing with tenants in these unprecedented times.
In this series of updates from our Real Estate lawyers, we provide guidance to both landlords and tenants on issues affecting commercial leases during the coronavirus outbreak. Please click here to read the latest guidance for tenants.
Government guidance for landlords is very much geared toward protecting tenants who cannot pay their rent, especially in the hardest hit retail and leisure & hospitality sectors.
Clearly, it’s key that you balance that with your own commercial realities. Make sure that any communication with your tenants is clear and collaborative and that any decisions take into account your cash flow and your insurance provisions as well as those of your tenants.
Changes to your right to forfeit
The new Coronavirus Bill sets out interim changes to a landlord’s right to forfeiture for non-payment of rent. Although the right to forfeit remains, your right to forfeit a lease for non-payment of rent is delayed during the moratorium period set out by the Government. Effectively, your ultimate sanction against a tenant has now been extended to the end of September (previously the end of June) and the rent arrears do not have to have arisen as a result of the coronavirus.
It’s worth noting, though, that in the current market conditions you would not necessarily want to remove a tenant, so forfeiture is not an attractive option anyhow. Unless the moratorium is extended again, you will be able to enforce rent payment by forfeiture after the end of September.
The idea behind the moratorium is to provide assistance and give breathing space to tenants in relation to the March and June quarter day rent payments and it remains to be seen what will happen for the next quarter payment and whether the moratorium will be lifted or extended again. Therefore it is important, when reviewing your cash flow status in the light of possible rent concessions, to take a longer term view past end of September.
These changes do not apply to other breaches and but you should note that your other remedies have also been affected such as those under CRAR (the use of which is restricted and the arrears provision has been extended from 7 days to 187 days) and measures in relation to the use of winding up petitions based on statutory demands and the presentation of a winding up petition by a creditor. Practically speaking, you should also note that it may be unlikely that there will be any personnel still working in order to pursue these routes. You can also still claim late payment interest in accordance with other lease provisions, such as claiming against guarantors, or make a debt claim or claim against the rent deposit.
For proceedings already in the courts, courts will not be able to order the tenant to give up possession before end of September 2020. If an order for possession has already been made with a possession date prior to end of September 2020, the date will be extended to a date after the end of September.
Your tenants’ obligations
You should note that under the lease provisions, it is only your right to forfeiture that has been delayed.
Your tenants are still obliged to continue to pay the rent and you are under no obligation to offer concessions. Rent suspension is more often than not linked to damage and destruction rather than for events such as coronavirus.
Your tenants should:
- check their insurance provisions for business interruption claims to see if they can recover rent payments due to it being a notifiable disease
- make you aware if they are not occupying their unit. Their (and your) insurers may need to be made aware if the non-occupation continues for a certain period of time.
- explore any measures to help businesses, such as HMRC concessions for tax as well as any government business grants, loan schemes, furloughing of employees and business rates’ holidays, etc.
As set out above, you as a landlord do not have to offer concessions.
However, in these circumstances the Government encourages you to adopt a collaborative approach to your dealings with your tenants and start an open dialogue to help improve your tenants’ cash flow when they have no option but to seek a rent concession – of course, without adversely affecting your cash flow.
What you can do when considering concessions:
- Look at your cash flow to see where you can reduce or defer rent, to whom and for how long, etc. so you have a measured, consistent – and perhaps more long-term in light of the uncertain timescales – approach to all tenants.
- Look at your insurance provisions to see if you can make a claim, and ensure you are meeting your obligations in terms of what you need to notify.
- Look at what assistance the Government is giving to businesses and landlords and take this up if you entitled to.
- Keep an eye on business rates policies (in case you have empty properties) for concessions in business rates.
You are not automatically released from obligations under the lease in terms of public health matters. You should also carry out services (if there is a service charge) in accordance with the lease. Although, if you are unable to due to non-availability of materials and labour, you will be able to rely on provisions in the lease that set out that you are not liable to carry out services where you cannot do so for reasons beyond your control. It may be that you have to increase some services such as deep-cleaning of the common parts and you should ensure these are factored into the on-going service charge.
Options you could offer your tenants, if cash flows allow, include:
- accepting monthly instead of quarterly rents
- rent discount for one or more periods
- rent-free period
- rent deferment, say from March to June
- using the rent deposit to pay the rent, or
- accepting payments in arrears rather than in advance.
Issues to consider when opting for rent deferment
- What is the payment plan? For example, do September and later payments become due at the same time or will both be spread over the remaining rent payments for the year?
- What interest rates are you going to apply? Is it default interest rate – usually 4%?
- When will the interest period kick in – from the original payment date or the new payment date?
Issues to consider when using the rent deposit to pay rent
- What are the mechanisms – timing and amounts- for replacing the rent deposit?
- If your tenant becomes insolvent/bankrupt, you will be entitled to use this rent deposit to cover losses.
Rent concessions: spelling out the terms
Whatever type of rent concession you opt for, you should:
- make it clear what payment dates the concession applies to, what the duration is and how and when the shortfall/balancing sum of rent will be made up
- specify what payments the concession will apply to – the new measures apply to insurance rent, service charge and other payments due under the lease so you will need to give careful consideration to this as you may still have the burden to provide services and insurance.
Tenants may argue that non-payment of the above payment is justified if you are not providing the relevant services. It will be harder to argue non-payment of insurance rent as the premiums will still need to be made. Therefore, you should consider how concessions for service charges are dealt with – will you defer them with a higher balancing payment at the next payment date? Or if you are temporarily suspending them and not re-charging them, then will you credit them to the next payment as part of the balancing payment? If reconciliation happens during a deferment period, how will this be dealt with?
Dealing with rent concessions: practical steps
- Deal with temporary rent concessions by side letters personal to the tenant (and not its successors in title).
- Make it very clear that, notwithstanding the point above re: waiver, temporary rent concessions are in no way long-term waivers of your rights.
- Make sure the side letters are carefully drafted to avoid any unintended consequences.
- Email letters to tenants and guarantor/s. Make sure they sign the copy of the letter and return to you.
- Ensure that you have a streamlined process to deal with any requests.
- Carefully monitor the responses from tenants and guarantor/s.
- Keep precise records of the payments made and monitor your cash flow continuously.
- Put in place procedures in relation to the collection of post and letting tenants know of an alternative address for service of notice.
You should note that some landlord actions result in a waiver of forfeiture. However, during this period, some comfort may be provided in that no conduct by landlords in respect of forfeiture for non-payment of rent is to be regarded as a waiver of right to forfeit for non-payment of rent.
That said, you should still be extremely careful of what is put in writing to tenants to ensure that you do not inadvertently expressly waive any landlord rights. Provisions for terminating the temporary arrangement (events of termination to include assignment, subletting, insolvency and breaches of obligations – which may differ depending on the type and duration of concession offered) must also be considered including notice periods therein. The obligation to pay rent resumes (with interest) once a termination event occurs.
Other matters to document /consider
Your tenant may be able to break the lease during the moratorium, depending on the lease provisions and whether effective notice has been given or not. Leases usually require all rent payments to be up to date in order for the tenant to break the lease, but will this still be the case in a rent concession situation? If there are any imminent break dates, this point will need to be considered. Otherwise there could be uncertainty as to whether the breaking party has validly exercised the right or even if the right is capable of being exercised. Ensure you are aware of any imminent break rights so you can deal with them effectively.
Rent review provisions
If the assumptions for the hypothetical lease in the rent review provisions do not reflect reality, this could result in an artificially high or low rent (e.g. value of a closed premises is far lower than an empty one). The key date is for rent review is the date in the lease, not when the review is being carried out. If there is an impending rent review, it would be best to set out in the letter how this will be dealt with. Will the concession be disregarded?
Terminating the lease
It is highly unlikely that tenants can claim the right to terminate the lease (unless they exercise a break clause properly or the lease is going to expire shortly or they are holding over) for, say, frustration or force majeure. You should be careful not to allow the lease to be impliedly surrendered by operation of law by accepting the keys back, for example. Should a tenant simply walk away, they are still liable for existing obligations.
You cannot rely on a tenant’s non-payment of rent to oppose a renewal of a business tenancy under the LTA 1954.
It may be worth reviewing the wording for future leases and perhaps adding some clauses (such as to the rent suspension clauses) in relation to events such as pandemics such as these.
[this article was updated on 24 June 2020 to reflect an update to the end of the forfeiture moratorium period from the end of June to the end of September]
Our specialist Property Disputes lawyers are well versed in all landlord and tenant matters and are keeping a watching brief on the measures the Government has taken. Natasha Bowcott:
07521 504 264 Email us
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