This is the key area of concern for most Landlords and Tenants at present as the pandemic lockdown has curtailed a number of business activities meaning that they have reduced cash flow, which in turn may be causing difficulties in meeting obligations, such as the payment of rent.
The Government has sought to support businesses by putting in place funding for staff furlough and other grants. However, these schemes are taking time to administer and may not offer sufficient support in many cases to ensure tenants are in a position to pay rent under the terms of their lease.
Variation of Payment Arrangements
The Government still expect tenants to be paying rent where possible and measures are primarily directed at those who genuinelt find themselves unable to do so as a result of the pandemic. Landlords are being asked to be flexible where possible, though many are still coming under pressure from Lenders to make payments and have other financial obligations to meet themselves, which may restrict their ability to do so.
The Financial Conduct Authority, the Financial Reporting Council and the Prudential Regulatory Authority have issued a joint statement encouraging investors and lenders to take into account the issues arising directly from the Covid 19 pandemic in responding to potential breaches of covenants. However, no formal measures have been proposed as yet that might offer direct assistance to Landlords in respect of curtailed rental income.
Where possible many temporary variations are being agreed to delay payment of the current rent over the present period of lockdown. This may involve a period of paying less or no rent for a few months, with the balance being made up in staged payments over an extended period. Care should be taken when documenting such agreements to ensure there are no unintended consequences or variations to the rights of either party in the future.
Restrictions on Forfeiture
Section 82 of the Coronavirus Act 2020 (“CA 2020”) sets out emergency measures to restrict forfeiture of Commercial Business Tenancies in England and Wales where tenants find themselves in financial difficulties. The relevant period for these provisions lasts from 26 March 2020 until 30 June 2020 but is subject to review and may be extended.
Section 82 of CV 2020 provides a moratorium in respect of forfeiture for non-payment of “Rent” under relevant business tenancies. “Rent” for the purposes of the CA 2020 is widely defined to include any financial payment due under the relevant lease. This would include service charges, interest and administration fees as well. It may also be considered to include amounts payable if the landlord has exercised its rights under a Jervis v Harris clause to undertake repairs at the expense of the tenant.
There is a possibility that business rates may also be caught under the legislation as the definition does not limit this to sums payable to the landlord. Further clarification will come in time on this point.
Although landlord’s remedies are restricted in relation to default of financial obligations, there is no constraint at all in respect of forfeiture for other non-monetary breaches. Therefore, a landlord may potentially forfeit a lease for any other breaches in the ordinary way, subject to complying with all the normal requirements to serve a section 146 notice as a precursor to forfeiture. However, issues may well arise in relation to the coronavirus concerning service and how much “reasonable time” a landlord must allow to a tenant to remedy any remediable breach under section 146 of the Law of Property Act 1925.
Therefore, although section 82 affords business tenants some measure of relief, it would not prevent a determined landlord from still seeking forfeiture of the lease on other grounds. That said, in non-rent cases, the court has a broad discretion in relation to granting relief from forfeiture and the courts are unlikely to be receptive to claims by landlords which stem from pandemic-induced situations. They may still be willing to support a landlord’s forfeiture though in cases where the underlying tenant breaches are entirely independent of the current public health emergency.
A “relevant business tenancy” is considered to be any business tenancy where the demised premises or any part thereof is occupied either by the tenant or by any lawful occupier and would include a sub-tenant or licensee.
If a business tenant is not trading from the premises because of coronavirus and the associated statutory restrictions (Health Protection (Coronavirus, Restrictions) (England) Regulations 2020, SI 2020/350) the it is likely to be sufficient to establish occupation if they can show they intend to return to the premises once the restrictions are lifted.
The position for businesses who have voluntarily closed their doors is less clear. It is likely that courts will take a sympathetic view in these cases too and regard such tenants as remaining in occupation, particularly if there are still possession in the property and there is an intention to return to trading from the premises once the crisis is over. There is more room for argument in these circumstances.
Current Possession Proceedings and Orders for Possession
Proceedings issued before 26 March 2020 are subjected to the same restrictions relating to the ability to recover possession earlier than the expiry of the relevant period, which is currently 30 June. Therefore, any possession orders issued must expire no earlier than 30 June or such later date as may be substituted by regulations.
Where an order was made before 26 March 2020 and the date of possession will expire within the moratorium window the date of effective possession will be delayed.
For High Court Possession Orders, the tenant must apply to extend the order and the Court must allow an extension to the end of the relevant period. The extension is not automatic though, but if an application is made the order to extend is mandatory.
If the order has been made in the County Court, then it is to be treated as extended so as to expire at the end of the relevant period.
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. During lockdown this cannot be utilised fully due to social distancing provisions, but some Landlord have started the process by having Bailiffs serve the initial notices.
An announcement was made by the government on 23 April 2020 that they intend to bring legislation forward to prevent the use of CRAR unless there is more than 90 days of rent in arrears.
On the 23 April 2020 the Government announced an intention to put in place a temporary ban on the use of Statutory Demands and winding up orders where a company cannot pay their bill due to the coronavirus pandemic. It is envisaged that the new measures would require 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 new legislation 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. It is envisaged that the new legislation to protect tenants will be in force until 30 June but may be extended in line with the moratorium on commercial lease forfeiture.
There is no restriction at present on drawing down on deposits in line with the requirements of any terms contained withing a Lease or Rent Deposit Deed. This may offer some assistance to Landlords in maintaining cash flow at this time. However, consideration needs to be given as it can often be difficult to persuade a tenant to pay back up the deposit security after it has been utilised. Where possible an agreement with the tenant as to how and when the deposit can be made up again should be reached before drawing down.
It is still possible to issue debt proceedings for recovery of rent. These can be costly and in the current climate, it is likely to take the Courts some time to process them. Once Judgement is obtained, there is also the question of enforcement, with many options restricted during lockdown, and the possibility that if the tenant genuinely cannot pay there may be little to enforce against. What level of costs can be recovered also depends on the terms of the Lease and the quantum of the arrears.
Recovering Possession from Trespassers
Under the current lockdown, commercial properties that would otherwise be occupied, may be more prone to squatters. Practice Direction 51Z was introduced on 27 March 2020 and put in place a moratorium for 90 days from that date for possession proceedings, which included those against trespassers. The addition since then of paragraph 2A means that applications against trespassers and for interim possession proceedings are no longer stayed. However, the ability of the Court’s to process them promptly is still likely to be restricted. The police have also shown a considerable reluctance to assist if it means parties will be back on the streets rather than safely contained.
Security of Premises
There have also been reports of increased criminal activity where commercial premises have been vacated during lockdown. Security of the premises remains the responsibility of the tenant and steps should be taken to ensure suitable measures have been put in place to secure the property while staff are not regularly attending.
Many insurance policies require premises to be occupied or notification to be given if premises will be unoccupied for more than 28 days. Upon notification, insurers may require other specified measures to then be put in place in order to continue cover.
Tenants are urged to check their policies and ensure steps are taken to maintain cover. They should also ensure that, where they have left occupation of the property during lockdown, they have taken steps to formally notify their Landlords of the same. Due to the current situation then it is highly unlikely that the lack of occupation in and of itself would be considered a serious breach of the lease. However, if a tenant fails to give proper notification to a Landlord, which leads to the invalidation of an insurance policy, then they may find themselves facing unexpected liability.
Where a Landlord arranges insurance for a property, they are under an obligation to ensure that is maintained and should be checking policies and taking steps to ensure such measures are put in place as are deemed necessary by their insurance providers.
Many tenants will also have business interruption insurance in place. Where initially claims may have been denied, government intervention in restricting business operation may mean that insurance cover is available for this period now.
Closure of Buildings
If a Landlord takes the decision to close a building, then they may face claims from tenants that there are breaches of covenant for quiet enjoyment or a derogation from grant. However, if the closure is a as a result of Covid 19 legislation or guidance then that would provide a defence. It the Landlord then goes beyond what is legally required or provided for in the guidance then they may find themselves liable for the tenant’s additional losses.
If a building is closed, then it is likely that the tenant will be expected to carry on paying rent, but the terms of the specific Lease should be checked. Most commercial leases require rent to be paid without deduction or set off. Rent suspension provisions are unlikely to apply.
Landlord’s Obligations to Provide Services
Very few leases contain a force majeure clause which would suspend a landlord’s obligation to provide services. However, there may be exclusions for matters outside of the landlord’s control or requirements may be to use reasonable endeavours to provide such services. Therefore, if it is not possible to do so due to legal restrictions, guidance or lack of availability of staff or contractors then it may not be considered a breach.
Provision of services should take into account the restrictions and requirements for social distancing that were introduced by the CA 2020 and the regular guidance being provided by Public Health England.
Whether or not a Landlord will be required to provide a deep clean of premises will depend upon the provisions of the particular Lease. An obligation to clean, and keep safe, the common parts may well include deep cleaning. However, it may not be practical to deep clean the common parts without coordinating with the tenants to clean the demised areas at the same time.
Landlord must also comply with health and safety requirements for their own employees and contractors and should not put them in a position that might pose a risk to their health. Documenting risk assessments and communications at this time is particularly important to guard against potential future claims.
Whether or not the cost of additional services can be recovered will depend upon the terms of the Lease, but many service charge provisions are likely to include a level of flexibility that would allow for such charges to be included in the service charge passed on to tenants.
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